Natural gas futures finished the first week of September on a high note, building on earlier gains in the wake of a seasonally meager government inventory report and reaching a two-week high.
At A Glance:
- Production falls near 100 Bcf/d
- Demand outlook remains mixed
- Storage surplus further narrows
Coming off a 10.9-cent rally the prior session, the October Nymex gas futures contract on Friday gained 2.1 cents and settled at $2.275/MMBtu.
NGI’s Spot Gas National Avg. picked up 1.0 cent to $1.745.
Senior broker Carley Garner of DeCarley Trading said on the heels of a favorable storage print, the October futures contract could in coming sessions break through the $2.30 level – a resistance point to date.
“If we were to get above that, I think we could easily see the high $2.00s, maybe even $3.00 on technical momentum,” she told NGI. “The market tends to build in a premium this time of year in case of a really bad winter.”
That noted, any bearish shifts in fundamentals could quickly infuse downward pressure into the market, she said. “If we fail to break through $2.30, we could see a full retest to the bottom of October’s range around $2.00.”
On Friday, as Garner noted, futures extended their winning ways after a paltry read on underground supply additions in late August.
The U.S. Energy Information Administration (EIA) on Thursday reported an injection of 13 Bcf natural gas into storage for the week ended Aug. 30. It proved bullish relative to analysts’ expectations for a build in the upper 20s Bcf and even more so compared to the five-year average increase of 51 Bcf.
Continued robust cooling demand in the South through late August, coupled with strong LNG volumes and easing production levels, kept the storage increase in check.
Accounting for degree days and seasonality, the EIA report was 6.4 Bcf/d leaner than the prior five-year average, Wood Mackenzie analyst Eric McGuire said. This was “the tightest we have seen this metric all year. The previous five weeks averaged 4.4 Bcf/d tight.”
While the latest injection boosted inventories to 3,347 Bcf and put stocks above the five-year average of 3,024 Bcf, the surplus narrowed from 12% the prior week to just below 11% at the close of August. It declined from about 40% early this year, when it reached a pinnacle amid a mild winter.
The storage surfeit “has now reached levels lower than any seen since January,” said RBN Energy LLC analyst John Abeln. He projected it would “decline further in the coming weeks on account of the dip in production levels.”
Fundamentally Speaking
Wood Mackenzie on Friday estimated production at 100.4 Bcf/d, down 1 Bcf/d from the seven-day average and off about 3 Bcf/d from summer highs. EQT Corp. and other producers had said that, barring a sustained price rally, they would curtail output heading into the shoulder season.
On the demand side, liquefied natural gas volumes held at 13 Bcf/d on Friday. That was in line with the average for the week and up from the 30-day average of 12.5 Bcf/d, Wood Mackenzie data show.
Weather-driven demand, meanwhile, tapered some in northern markets at the start of September. Still, enduring heat across much of the South and West kept air conditioners cranking and could do so through mid-month before leveling off, according to National Weather Service data.
Looking ahead to the next EIA report, covering the first week of September, analysts were expecting another seasonally modest increase. Preliminary estimates submitted to Reuters averaged 49 Bcf. That compared with a five-year average build of 67 Bcf.
Milder weather ahead could change the pattern.
“Even with the large bullish miss” in the latest EIA report, “current fundamentals indicate we will quickly be moving back to sizable injections in the coming weeks as power burns diminish into the shoulder season,” McGuire said.
Mizuho Securities USA analyst Nitin Kumar similarly said looming autumn weather could offset lighter supply, leaving him with “a neutral view on short-term natural gas prices.”
Physical Market
Spot gas prices varied by region on Friday, but advances in the South bolstered the national average.
Leading gainers included Houston Ship Channel, up 10.5 cents to $1.920, and Southern Natural, ahead 9.5 cents to $2.115.
NatGasWeather said that, during the coming trading week, swaths of the South and West could continue to bake under lofty temperatures. Elsewhere, however, conditions will be “comfortable with highs of 60s to 80s.” The pattern could be amplified by “heavy rains along most of the Gulf Coast and a cooler-than-normal weather system tracking across the Midwest and East.”
The projected southern rains were linked to a tropical system that was tracking toward the Gulf of Mexico, NatGasWeather said. The firm said “numerous” other tropical systems were worthy of watching closely in the second week of September, though none appeared “all that intimidating” as of Friday.
West Texas prices held in positive territory for a second session to close out the week for reasons beyond weather. This was notable because hubs in the area have struggled amid backed up supply in the Permian Basin. Prices were negative at Permian benchmark Waha through much of the summer. While the hub shed 5.0 cents, it averaged positive 11.0 cents on Friday.
EBW Analytics Group’s Eli Rubin, senior analyst, noted that the long-awaited Matterhorn Express Pipeline started initial flows from the Permian this month, beginning the process of easing the Permian supply glut.
Stil, Waha is far from the nearly $1.800 level of other key hubs such as Chicago Citygate and Algonquin Citygate near Boston.
While a boon to West Texas area hubs, more gas coming from the prolific basin could offset production curtailments elsewhere and potentially add bearish pressure on prices overall. “We estimate the pipeline could quickly add 1.0-1.5 Bcf/d of associated gas to national production levels within the next 30-45 days,” Rubin said.
On the maintenance front, Wood Mackenzie noted that Rockies Express Pipeline planned a two-day project beginning Sept. 24 that could cut more than 1 Bcf/d of gas flowing westbound in Ohio, potentially affecting prices at Lebanon. The hub on Friday rose 6.0 cents to $1.795.
More immediately, Kinder Morgan Inc.’s Tennessee Gas Pipeline Co. issued an operational flow order beginning Saturday (Sept. 7) and lasting until further notice that affects a broad section of the Southeast. It cited planned maintenance.
The Southeast Regional Avg. on Friday slipped 4.0 cents to $1.995.
