natural gas

natural gas

Monday, May 18, 2015

Natural Gas Corner - Market Update - Bearish Fundamentals Remain In Place

The natural gas market has closed higher three consecutive weeks as the spot June 15 contract crossed the $3.000/MMBtu on Friday for the first time since late-February.

The market has been boosted by above-normal weather forecasts across much of the eastern U.S., increased power generation demand, a falling rig count and renewed fund buying. 

Funds have been pouring money into the natural gas market over the past week after reaching a 3-year low in their speculative long position in the market the previous week.  Friday's Commitment of Trader's report showed the fund long position increasing by 51% with a current long position as of last Tuesday's close estimated at 96,565 contracts, up 32,564 contracts from the previous week.

Power generation demand for natural gas remains strong with May demand averaging 22.5 Bcf per day, up 11% from 2014 according to Bloomberg.  Power generation for natural gas is expected to be 32% of total demand this summer versus 33% for coal, the narrowest percentage differential between the two since 2012.

Friday's Baker-Hughes rig count showed an increase in the natural gas rig count by 2 to 223 but is down 103 from 2014.  Even with the lower rig count, production has been affected very little due to the efficiencies of the producers which is some cases can be profitable down to $2.000/MMBtu.

Storage injections over the past 6 weeks have had little affect on the market price although storage injections have totaled 436 Bcf during this time period, 152 Bcf of 54% higher than the 5-year average.  At some point this will matter but traders now appear focused on increased demand and an early start to summer in the eastern U.S. 

Longer term summer forecasts remain neutral-bearish with the high usage Texas and Midwest areas predicted to have below-normal temperatures lowering demand of natural gas for cooling.

Production may fall later in the year but continues to increase according to the EIA which released the monthly estimates for February in the latest Short Term Energy Outlook.  Production in February averaged 74.2 Bcf per day, up 10% from 2014.

The increase in end user demand, particularly by the utilities, is expected to lower the current oversupply of natural gas on the market which is estimated to be between 4-7 Bcf per day.

If production and storage injections remain high during this upcoming summer, end of October stockpiles could surpass the 4,000 Bcf mark which would be a new record. 

The rally in the natural gas market may progress over upcoming weeks, but overall fundamentals remain negative which could lead to new price lows later this summer.

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