Natural Gas Corner - Market Review - Better Opportunities For Adding Coverage Lie Ahead

Volatility in the natural gas market increased sharply over the past month as strong summer cooling demand for natural gas by power generators and near record high temperatures in the western U.S. have spiked prices.

Much of the market strength has been confined to the 2016 contracts with the remaining balance of the 2016 calendar strip up nearly 25% from the mid-May low in comparison to smaller 10% and 4% gains, respectively, in the 2017 and 2018 calendar strips.

Weather forecasts on both the short term as well as the longer term 30 and 60 day forecasts suggest a continuation of the heat wave across much of the U.S.   Power generator demand during June has topped 33 Bcf (billion cubic feet) per day, surpassing the previous record high set near the end of summer 2015.   With the heart of the summer cooling season upcoming during July and August, generator demand could remain high.  However, the recent rise in natural gas prices could lead to a switchback to coal from gas when possible by power generators which could impact natural gas demand.

Production has also been a supportive factor for natural gas prices as it has been in a general decline from the 73.8 Bcf per day high (dry-gas production) reached in February.  Production dipped under the 70 Bcf per day level in early-June but has since increased to the 70-70.5 Bcf per day level according to Baker-Hughes.  The EIA forecast in the June Short Term Energy Outlook that U.S. production would rise during 2016 by 1% in comparison to 2015.

Storage injections over the first 11 weeks of the injection season have totaled 573 Bcf, 139 Bcf or 20% lower than the 5-year average.  With 3,041 Bcf currently in storage, the surplus of gas in storage relative to the 5-year average has narrowed on an almost weekly basis. 

However, there was 2,468 Bcf of gas in storage at the end of the past winter falling just 4 Bcf shy of the previous record set in 2012.  Storage injections have been lower this year in comparison to past years due in part to storage summer cooling demand.  But storage injections have also lagged as current storage is at a record high for this time of year.  With 20 weeks to go in the injection season which ends the last week of October, only 968 Bcf or 49 Bcf per week will need to be injected into storage to reach last year’s record high 4,007 Bcf of gas by the end of the year.  Over the past 5 years, an average of 1,453 Bcf or 73 Bcf per day has been injected into storage over the upcoming 20 weeks.

The natural gas market is in the midst of a strong summer rally which could lead to higher prices over upcoming weeks.  However, the longer term test will be later this summer as cooling demand eases.

The likelihood for a second year of record high storage and the seasonal price trend for natural gas prices suggest a better entry point for adding longer term coverage will become available later this year.