Fundamentals gained the upper hand in natural gas futures trading on Wednesday, with the July Nymex contract expiring lower amid stubbornly strong production, robust storage levels and lagging LNG demand.
At A Glance:
- Production steady near 100 Bcf/d
- Storage surpluses seen holding
- Cash slides on softening demand
With Texas poised for a break from the triple-digit temperatures that have suffocated the state for weeks, July futures rolled off the board 16.0 cents lower at $2.603/MMBtu. The August Nymex contract settled at $2.668, down 12.1 cents.
Spot gas prices also floundered, with demand softening days ahead of the long holiday weekend. NGI’s Spot Gas National Avg. fell 1.0 cents to $2.690.
Although futures ultimately finished in the red on Tuesday, the losses were likely a temporary pause in the prior rally stemming from intense heat penetrating Texas and the broader South Central region. The July contract even managed to trade in positive territory on Tuesday before ending the session a modest 2.8 cents lower.
Wednesday’s action signaled a more convincing positioning among futures traders, with several bearish factors providing headwinds for prices. Early losses of less than 10.0 cents day/day ultimately gave way, with the prompt closing out Wednesday’s session only 1.0 cent above the intraday low.
Notably, production has continued to hover near 100 Bcf/d despite a slew of pipeline maintenance events that have curbed gas flows. At the same time, U.S. liquefied natural gas facilities continue to undergo prolonged maintenance following a winter in which they mostly ran at full capacity following Freeport LNG’s months-long outage and robust demand from Europe.
Also aiding the bearish backdrop are storage inventories that have swelled so far this summer absent strong cooling demand beyond Texas and the South Central region. Inventories as of June 16 stood at 2,729 Bcf, which is a massive 571 Bcf higher than the same time a year ago and 362 Bcf above the five-year average.
Looking ahead to Thursday’s Energy Information Administration (EIA) inventory data, analyst injection estimates ranged widely from 76 Bcf to 89 Bcf. That was the range of a Bloomberg survey of seven analysts, which produced a median build of 82 Bcf. A Wall Street Journal poll of 14 analysts had the same range, with an average build of 82 Bcf. Reuters had the same range, with a median build of 81 Bcf. NGI also modeled an 81 Bcf injection.
For comparison, the EIA recorded an 81 Bcf build in the same week last year. The five-year average injection is 80 Bcf.
With storage surpluses likely to remain intact awhile longer, there isn’t much for bulls to chew on to drive prices higher – for now.
However, Vortex Commodities CEO Brian Lovern said he’s been “against the bear story” for awhile. The last few EIA storage injections have been “relatively tight” given mostly moderate demand outside the South Central.
“That’s even with weaker LNG combating some of the weakness in production,” Lovern told NGI. “We typically grow 3-3.5 Bcf/d in production from now to the end of the injection season, so if that doesn’t happen, that will tighten us even more, all else being equal.”
Bears have cited expectations for coal to eat into gas burns for weeks, but it has yet to show up of any material consequence, according to Lovern. Whether it ever does is unclear, but if not, it’s increasingly difficult to see what may lead to “material, sustained downside in the land of prices,” the trader said.
“Perhaps summer demand will crap out after this upcoming heat, but given the warm climate, I wouldn’t want to bet much on that right now,” Lovern added.
Likewise, Lovern said there is some risk that European storage fills and turns back U.S. LNG toward the end of summer. That, too, though, seems to be less likely.
“Obviously, a lot can change, and I’m aware some smart, successful natty guys may be on the bear train still,” Lovern said. “But until I see something new in the data; this is how I see things.”
Buckling Cash Prices
Spot gas prices mostly softened midweek despite persistent heat over the southern United States.
Losses were relatively modest, however, with Texas prices sliding less than 10.0 cents day/day. Katy cash dropped 6.0 cents to $2.505, and Transco Zone 1 fell 9.0 cents to $2.520.
Despite the decline in prices, the scorching heat that’s baked the Lone Star State is expected to stick around a few more days. Houston independent weather forecaster Space City Weather said daytime temperatures should remain near 100, with overnight lows around 80. Rain chances remain near zero.
A break from the oppressive heat is starting to take shape for Sunday, according to the forecaster. However, it likely won’t be until Monday before a significant collapse of the dome of high pressure over Texas. This would open up the door to a weakness in the atmosphere that may allow for more moisture and a better chance of showers, according to Space City. More storm chances are likely into mid and late next week.
“We do continue to see signs that high pressure in the upper atmosphere may again try to exert itself over Texas after next weekend, but whether that means super hot and dry again or just generically hot with fewer rain chances remains to be seen,” Space City meteorologist Matt Lanza said. “Next week’s cooler change looks more temporary than permanent right now.”
Nevertheless, the price slide in Texas extended into other regions as well.
Spot gas prices at the Chicago Citygate slid 4.0 cents to $2.445, while Emerson tumbled a more pronounced 9.0 cents to $2.250.
Henry Hub cash managed to pick up a penny to reach $2.700, but Tenn Zone 1 100L dropped 10.5 cents to $2.380.
On the East Coast, New England markets posted far more substantial declines as showers ushered in comfortable high temperatures in the 70s-80s. Algonquin Citygate cash plunged $1.200 day/day to average $5.940, and PNGTS fell $1.155 to $4.850.
