Natural gas futures flopped on Friday, capping a week of losses driven by rising production volumes that threaten to keep storage levels far above historic norms.
At A Glance:
- EIA prints 71 Bcf storage build
- Production rises to 101 Bcf/d
- Forecasts call for more heat
The July Nymex gas futures contract shed 3.6 cents day/day and settled at $2.705/MMBtu. It marked the sixth drop in seven sessions.
NGI’s Spot Gas National Avg. ticked down 4.0 cents to $2.075.
The U.S. Energy Information Administration (EIA) on Friday reported an injection of 71 Bcf natural gas into storage for the week ended June 14. The result came in well below the five-year average increase of 83 Bcf. But it was above NGI’s 69 Bcf estimate, which matched the median expectation found by polls. This raised concern that the market may have underestimated the pace of a June recovery in production.
“Production is a big part of it,” Carley Garner, senior broker and analyst at DeCarley Trading, told NGI. “We have a lot of natural gas right now.”
She also noted that end-of-week trading volumes in the summer tend to be light – and Friday was no exception. That provides buyers fewer entry points. “Everything is pretty thin across the board,” Garner said. "There’s not much going on.”
The increase for last week lifted inventories to 3,045 Bcf, putting stocks 23% above the five-year average of 2,484 Bcf. The surplus declined steadily through the spring season, largely because producers pulled back amid low prices. It continued to decline in the latest covered period, though only by about a percentage point from the prior week.
Morningstar DBRS analyst Andrew O’Conor expects natural gas supply/demand balance to continue to tighten as record-breaking early summer temperatures boost natural gas-generated electricity demand.
“However, since gas storage remains ample, it will require further significant changes in market conditions for the market to enter the 2024-25 winter with inventory at an average or below-average level,” O’Conor said.
NatGasWeather said both the American and European forecast models advertised the hottest Lower 48 high temperatures in 45 years to finish June and start July. This would indicate “selling is primarily due to other reasons, such as stronger week over week production” and “plump surpluses that will take time to be reduced.”
That noted, persistent heat and robust cooling demand could steadily narrow the inventory surfeit toward 450 Bcf over the course of late June and next month, the firm said, if production does not ramp up even more.
Lower 48 natural gas output stood at 101 Bcf/d on Friday and, on average, eclipsed that level over the course of the past week, according to Wood Mackenzie estimates. The firm on Friday said it expected production to hold above the 101 Bcf/d threshold through the week ahead as well.
Total demand, meanwhile, averaged about 99.6 Bcf/d over the past week, according to Wood Mackenzie. That included 7.2 Bcf/d of pipeline exports to Mexico and 12.3 Bcf/d of LNG send-outs overseas, the firm’s Friday estimates showed.
Production Prominence
The production recovery represented a strong rebound from producers’ shoulder season easing. The recent increases risked overshooting demand, analysts said. Production slipped to as low as the mid-90s Bcf/d during the spring months amid maintenance events and curtailments in response to low prices. But producers have boosted activity in June and introduced a bearish element for prices, as NatGasWeather noted.
EBW Analytics Group analyst Eli Rubin said that, simply put, “higher natural gas production is offsetting the impacts of record heat” that peppered swaths of the Lower 48 over the past week.
“Our most likely end-of-October storage target lingers at the high end of our projected 3,900-3,950 Bcf range, implying risks of longer-term downside for natural gas into late summer and early fall as supply grows and hurricane demand destruction risks rise,” Rubin said, noting forecasts for a particularly active Atlantic storm season. In the near term, he added, “gas prices may remain heavily dependent on the extent of scorching July heat to soak up supplies as returning dry gas production rises into mid-summer.”
By region, the latest storage report showed the East and Midwest led with builds of 28 Bcf and 24 Bcf, respectively, according to EIA. The South Central injection of 9 Bcf followed. Mountain region stocks increased by 6 Bcf, while Pacific inventories rose by 3 Bcf.
Looking ahead to the next EIA print for the week ended June 21, analysts were generally expecting another seasonally soft build. Preliminary estimates submitted to Reuters ranged from additions of 30 Bcf to 66 Bcf. The estimates compare with a five-year average increase of 85 Bcf.
Layering in historical movement in prompt month trading for this time of year, The Schork Report’s analysts estimated only a 14% chance the July contract would culminate its run at the front of the curve above $3. They calculated a 34% chance of it finishing at $2.630 or lower.
Varied Cash Prices
Spot gas prices were mixed on Friday, with strong gains in the West but pullbacks in the Midwest and Northeast after rallies earlier in the week.
Algonquin Citygate near Boston fell 16.0 cents day/day to average $2.240, for example, while Joliet in Illinois shed 4.0 cents to $2.135.
Out West, however, gains were widespread.
SoCal Citygate climbed 22.0 cents to $1.995, while Malin in the Northwest advanced 16.0 cents to $1.955. El Paso S. Mainline/N. Baja in the Southwest gained 23.0 cents to $1.900.
For the week ahead, NatGasWeather said forecasts as of Friday called for upper high pressure to “rule vast stretches” of the Lower 48. This could deliver highs of 80s to lower 90s across the northern third of the country and upper 80s to 100s elsewhere. Extreme heat is in the cards for portions of the heavily populated West Coast and across the South “for strong to very strong demand.”
The “long-range data maintains a hotter-than-normal U.S. pattern for the first half of July,” the firm added, “to keep weather patterns to the bullish side.”
An active start to the 2024 hurricane season presents an ongoing wildcard, however, said Wood Mackenzie analyst Kara Ozgen.
Alberto, the first named storm of the season, dissipated by Friday, but not before it crossed over Mexico and delivered chilling rains and power outages to South Texas, dampening demand there. The system peaked at tropical storm strength.
Another disturbance had emerged in the same area as Alberto, Ozgen noted Friday. The National Hurricane Center said Friday it had a 60% chance of forming into a storm during the week ahead, presenting the possibility for another bout of heavy rains impacting portions of the Lone Star State.
Additionally, a disturbance west of Florida held the potential to form over the weekend as it approached the Southeast. “While this might bring some marginally cooler temps to portions of the Southeast,” Ozgen said, forecasts showed the region “warming back up to above-normal temps starting late Saturday” and extending into the coming trading week.
