Natural gas futures rallied after a rare summer storage draw but then lost steam Thursday, possibly from profit taking as traders took a cue from cash markets still under the spell of oversupply.
At A Glance:
- EIA reports 6 Bcf withdrawal
- First summer storage draw since 2016
- Mixed weather trends into weekend
The September Nymex contract fell 2.2 cents to settle at $2.197/MMBtu. It traded as high as $2.301 after the 10:30 a.m. ET government storage report showed a withdrawal of 6 Bcf for the week ended Aug. 9.
Meanwhile, physical trade was weaker, with West Texas sinking back further into the negative. Under that weight, NGI’s Spot Gas National Avg. shed 2.5 cents to $1.670 as gains were mostly in the single digits across the country’s midsection, eastern region and Rockies.
Market participants speculated that the sell off in futures could have been sparked by profit taking and weaker price action in cash markets. NGI’s Henry Hub cash price was up 1.0 cent day/day to $2.180. Additionally, there was the risk that an easing of maintenance on pipelines could allow some production levels to bounce back.
Historic Draw
The U.S. Energy Information Administration’s (EIA) reported 6 Bcf draw was just the fourth time Lower 48 working natural gas inventories have seen a summer withdrawal in records back to 1994, according to Andy Huenefeld, managing partner at Pinebrook Energy Advisors. The previous draws were in July 2016 and July and August in 2006.
The reduction contrasted with an injection of 33 Bcf a year earlier and average gain of 43 Bcf for the week over the previous five years. The difference chopped the surplus down by 49 Bcf to 375 Bcf, or 13% above the five-year average. That’s down from 39% in late March.
August injections were on pace to be the smallest since at least 2000, with the next five weekly reports potentially adding a cumulative 150 Bcf, or 4.3 Bcf/d tighter than the five-year average, according to EBW Analytics Group’s Eli Rubin, senior analyst.
“If gas prices rise and speculators are forced to cover short positions, a rally and higher Nymex pricing could be ignited – despite seasonal fundamentals indicating oversupply,” he added.
The current glidepath for surpluses has them on pace to drop below 350 Bcf by the end of August and be near or under 200 Bcf by mid-November, NatGasWeather said. However, the pace of production “will dictate just how fast and how much surpluses drop by in the coming months,” the firm said.
By region, the Midwest and East increased stocks by 15 Bcf and 4 Bcf, respectively, according to EIA data. Mountain region stocks rose by 3 Bcf.
South Central gas stocks fell by 27 Bcf to shift the overall trend negative. That tally included draws of 14 Bcf from salts and 12 Bcf from nonsalt facilities. Pacific inventories were lower by 2 Bcf.
Ahead of the print, analyst estimates spanned a range from a 6 Bcf draw to a 12 Bcf build, according to surveys by Reuters and Bloomberg that had median build estimates of 4 Bcf and 1 Bcf, respectively.
Early reads for the next EIA report covering the week ended Aug. 16 submitted to Reuters ranged from a withdrawal of 3 Bcf to an injection of 52 Bcf, with an average increase of 33 Bcf.
‘Fever Dream’ Reset
The storage draw sent analysts to revisit their output estimates because the bullish miss could indicate cutbacks in production not picked up by nomination-based estimates.
Pinebrook’s Huenefeld noted that the draw occurred during a week that was not as hot as late July that registered builds. While some of that could be from waning solar and wind output ceding power market share to gas units, “it could also suggest that domestic production estimates may be overshooting reality given the consistently tight storage numbers in recent weeks,” he said.
Wood Mackenzie analyst Eric McGuire said the report showed supply and demand was the tightest it has been since May on a weather-normalized basis. The report week was 4.9 Bcf/d tighter than the prior five-year average and 3.5 Bcf/d tighter week/week, he said.
The industry’s daily estimates of production are based on publicly available flow data that do not capture all pipelines, leaving it up to weekly EIA storage reports to true-up estimates of production and demand.
“Estimating actual production is a bit of a fever dream,” Criterion Research Inc.’s James Bevan, vice president of Research, said on online energy platform Enelyst.
Lower 48 production averaged 101.2 Bcf/d over the seven days to Wednesday, down from a 30-day average of 102.0 Bcf/d, according to Wood Mackenzie. Thursday’s initial estimate of 100.4 Bcf/d was likely to be revised higher in later nomination cycles.
Meanwhile, NGI’s U.S. LNG Export Flow Tracker showed liquefied natural gas terminals were scheduled to receive around 12.8 Bcf/d on Thursday, up about 0.7 Bcf/d day/day.
Cash Weaker
Natural gas spot prices fell on average for next-day deliveries on Thursday, pulled lower by West Texas prices slumping amid oversupply.
Permian Basin benchmark Waha sank 95.0 cents day/day to average at negative $1.330. That weakness did not extend to other areas of Texas. For example, Katy added 5.0 cents to $1.900. Severe heat was forecast to continue across southern states including Texas, AccuWeather senior meteorologist Renee Duff said. Highs in the 90s and 100s were expected Friday to Monday,
Meanwhile, in the Northeast, cooler conditions would take hold, with highs in the 70s to low 80s over the same period, the forecaster said.
“While the Northeast is experiencing a pause in the summer heat, all indications point toward the South Central states continuing to swelter,” Duff said. The hot weather was expected to last until the last week of August with temperature spikes 5-10 degrees above normal in the South and Gulf Coast states, she added.
Eastern hubs were mostly higher ahead of the cooldown. Algonquin Citygate near Boston added 5.5 cents to $1.780. Texas Eastern M-2, 30 Receipt in Appalachia rose 5.5 cents to $1.610.
Among decliners, Transco Zone 4 in the Southeast fell 5.5 cents to $2.325, while SoCal Citygate in California fell 5.0 cents to $1.940.
