Natural gas bulls are in a good place right now, following the crash in prices to record lows just three weeks ago. But it’s probably not the ideal sweet spot they’d like.
NYMEX Henry Hub natural gas futures made meaningful gains on Wednesday, with the August, September and even October contracts posting gains—reflecting anticipated demand to run air-conditioners during the warmer months.
But a glance at the winter-month contracts tells a different story.
The December through February contracts were barely changed on the day—with key March even falling into negative territory—on signs that there will be an excess of gas in storage during those winter months.
A glut of winter gas can only mean one thing: even with freezing weather and the higher demand from utilities to power heating in homes and businesses alike, inventories may not clear quickly enough.
“Contracts in the winter of 2020-21 that bid higher during the spring and early summer are now facing relentless downward pressure,” Gelber & Associates gas strategist Dan Myers said in an email on Wednesday to clients at the Houston-based consultancy.
“The closer these months approach, the clearer a picture of persistent oversupply and surplus, near-record storage inventories in the coming winter becomes inevitable.”
Welcome Relief From Summer Heatwave
For gas bulls, the summer heatwave continues to offer a reprieve from months of depressed prices. In fact, it may even be a little too hot, naturalgasintel.com said in a report, citing a forecast by Bespoke Weather Services.
“This illustrates the difficulty the models are having regarding intensity of heat,” the forecaster was quoted saying.
“It is absolutely a hot pattern, still on pace to match or edge out, July 2011. Models keep projecting too much heat in the medium range, with this week being the prime example. Next week’s upper-level pattern looks stronger, and the pattern should remain biased hotter than normal into August, so weather definitely is not bearish by any means. Models just may continue to overshoot some at times, given recent biases.”
Gelber & Associates’ Myers concurred with that:
“The heatwave will result in very strong demand, curbing gas injections into storage through the remainder of July."
“However, this is typical, and, if or when the intense heat subsides, the market will resume strong storage increases that carry it towards a record of more than 4.1 trillion cubic feet of gas in storage prior to winter.”
Storage Gets A Reprieve Now, But Not For Long
Storage watch is all important, with the US Energy Information Administration expected to report a below-average injection of 47 billion cubic into inventories for the week ending July 10th in its weekly report on gas balances, due at 10:30 AM ET.
That 47 bcf injection compares with the increase of 67 bcf during the same week a year ago and a five-year (2015-2019) average build of 63 bcf for the period.
In the prior week to July 3, utilities injected 56 bcf of gas into storage.
If analysts are on target with their projected increase of 47 bcf, stockpiles will rise to 3.180 trillion cubic feet. That would be about 16% higher than the five-year average and 26% above the same week a year ago.
Heatwave Helps Distract Market From LNG Crisis
The summer heatwave also serves as a distraction to the loss of demand on the LNG side.
LNG, or liquefied natural gas, remains an area of weakness, while the coronavirus pandemic extends deep into the summer, providing added reason to scrutinize the injection result.
Virus outbreaks have tempered economic activity in key US LNG export destinations in Europe and Asia, hampering supply/demand balances since the onset of the pandemic earlier this year.
Disclaimer: Barani Krishnan does not own or hold a position in the commodities or securities he writes about.