Natural gas prices spiked in August bidweek trading as markets absorbed the impacts of stifling heat across most of the Lower 48, and traders took note of forecasts for robust cooling demand to continue in the month ahead.
Choppy production levels, along with steady demand for American exports of LNG, added further fuel for the bulls’ parade. NGI’s August Bidweek National Avg. jumped $2.465 month/month to $8.765/MMBtu.
The result more than doubled August 2021 levels, when the bidweek average was $3.900/MMBtu. The 2020 Bidweek National Avg. for August came in at only $1.680.
Lofty temperatures in the 90s and 100s were widespread in late July, while production struggled to maintain its summer peak of around 97 Bcf/d. Often output dipped to around 95-96 Bcf amid unplanned maintenance work, stoking fears of insufficient supplies and supporting prices.
“Supply/demand balance is very tight,” StoneX Financial Inc.’s Thomas Saal, senior vice president of energy, told NGI. “This heat is putting a lot of stress on the system.”
In the central United States during bidweek, Chicago Citygate climbed $2.110 to $8.450, and El Paso Permian gained $2.500 to $8.150.
Prices across the East also surged. Florida Gas Zone 3 soared $8.500 to $15.810, while Algonquin Citygate near Boston advanced $2.585 to $8.835.
Out West, SoCal Citygate rose $2.515 to $10.065, and KRGT Del Pool gained $2.590 to $9.805.
Demand Up, Output Uneven
During the bidweek period, which spanned July 25-27, the August Nymex natural gas futures contract rolled off the board last Wednesday (July 27) with a 30.6 cent-cent loss to settle at $8.687.
However, that followed a furious rally through much of July. Futures forged ahead on the production woes and strength in physical markets, as well as steady European demand for U.S. liquefied natural gas. Elevated cooling demand in Europe amid an exceptional heat wave there comes on top of waning gas supplies from Russia.
The Kremlin dramatically cut gas flows to Europe – down to 20% of capacity in late July — citing repair and equipment delays that it blamed on Western sanctions imposed to protest Russia’s invasion of Ukraine. Analysts viewed it as retaliation against the sanctions.
Heat, meanwhile, remains the dominant theme in the United States.
Preliminary estimates showed that each of the last two months were among the five hottest Junes and Julys on record, respectively. More widespread highs in the 90s and 100s this month are expected to keep upward pressure on prices – absent, that is, sustained momentum on the production side.
EBW Analytics Group analyst Eli Rubin said the heat also could minimize utilities’ collective ability to stow away gas in storage for winter, potentially leaving the market light on supplies for the coming heating season.
“Scorching heat and low storage injections are likely for at least the next three weekly storage reports,” Rubin said after the government’s inventory assessment last week. “Our updated storage trajectory suggests that the storage deficit versus the five-year average could climb 2.0 Bcf/d over the next three reports to reach 387 Bcf.”
The U.S. Energy Information Administration (EIA) last Thursday reported an injection of 15 Bcf natural gas into storage for the week ended July 22. Prior to the EIA report, major polls found analysts expecting a print of about 20 Bcf.
In the comparable week last year, EIA printed an injection of 38 Bcf, while the five-year average injection was 32 Bcf. The increase lifted inventories to 2,416 Bcf, but it left stocks well below the year-earlier level of 2,709 Bcf and the five-year average of 2,761 Bcf.
Slow September Start
The September futures contract gave up ground over its first two days as the prompt month amid sobering economic news and technical resistance.
Gross domestic product, adjusted for inflation, shrank at a 0.9% annual rate in the second quarter, the Commerce Department said Thursday. It marked the second consecutive quarterly decline. A slowing U.S. economy could translate into lighter commercial and industrial natural gas consumption.
Traders “might have arrived at the conclusion that a U.S. recession does not bode well for future demand,” analysts at The Schork Report said, explaining why futures faltered Thursday despite a bullish storage report.
On Friday, however, after traders digested the bullish EIA report, the new front month gained 9.5 cents day/day to settle at $8.229. That marked a 4% rise from the prior week’s finish.
This followed fresh assessments of storage that focused in particular on strong cooling demand in Texas and withdrawals in the South Central region that punctuated concerns about deficits.
“Month-to-date, the South Central region has drawn 24 Bcf versus a five-year average build of 3 Bcf, pointing to one of the hottest Julys on record,” Tudor, Pickering, Holt & Co. (TPH) analysts said Friday.
TPH estimated a roughly 3.0 Bcf/d undersupplied market during the latest EIA report week after adjusting for weather, unchanged from the week-earlier period.
The September futures contract pushed further ahead Monday, rising 5.4 cents to settle at $8.283.
The temperature outlook continued to point to above-average demand the next two weeks, Bespoke Weather Services said Monday.
“We still have some impressive, near-record hot days this week” in terms of national gas-weighted degree day totals, “and every single day of the 15-day forecast is projected to be hotter than normal,” Bespoke said. “As such, it is still a supportive weather picture overall.”
Looking ahead, all eyes would likely remain on forecasts, production and storage, Saal said. Given the intensity of heat, he expects “slim” inventory injections and deficits to the five-year average to persist.
He also noted pipeline exports to Mexico are at solid levels this summer, and LNG demand shows no signs of easing any time in the foreseeable future.
“LNG has been a game changer,” Saal said.
Storage concerns could mount, he said, if pending long-range forecasts for the next winter show long stretches of bitter cold.
“If it’s anything like last winter,” when demand proved strong, “we’re going to see some fireworks” in natural gas prices, Saal said.
