Bearish Natural Gas Injection Report Caps a Bullish Month

The U.S. Energy Information Administration (EIA) on Thursday (June 9) reported a surprisingly bullish 65-Bcf injection for the week ended June 3—that was 8.0 Bcf below our Natgas Billboard estimate and more than 10 Bcf below the Bloomberg industry average assessment. In response, the CME/NYMEX Henry Hub July natural gas contract screamed about 15 cents higher following the report to a settle of $2.617/MMBtu, the highest daily settle for the prompt month in nearly 9 months. Thursday’s gains extended a rally that began on May 31 (2016) just after the July contract rolled to the front of the futures curve. It’s likely the rally was initially spurred by market participants looking to cover their short positions. But in the past week, an increasingly bullish fundamental picture has emerged prompting us to raise our price outlook (in our June 10 NATGAS Billboard report). In today’s blog, we analyze the fundamentals behind rising natural gas prices.

The natural gas futures contract for the prompt month barreled a net ~$1.00 (26%) higher in the past 12 days as the potential for prolonged production shut-ins in the Gulf of Mexico after Hurricane Ida amplified already-heightened supply fears in both the U.S. and international gas markets. The blistering price action sent the CME/NYMEX Henry Hub October futures contract soaring on Wednesday to an intraday high above $5/MMBtu and a settle of $4.914/MMBtu, the highest during September trading since 2008, while the prompt December and January contracts settled above $5/MMBtu for the first time in years. Prices at European and Asian gas/LNG hubs have similarly rallied this summer to multi-year or even all-time highs. Offshore Gulf gas production has since begun to recover, slowly, after the Ida-damaged Port Fourchon in Louisiana, the base of offshore oil and gas operations, reopened over the Labor Day weekend, but the bulk of it remains offline as power outages and other operational challenges persist. The shut-ins are exacerbating an already tight market, marked by record LNG exports, lackadaisical production growth, and a growing inventory deficit compared with year-ago and five-year average levels. Those underlying fundamentals will remain a trigger point for price spikes well after Ida-related shut-ins recover. Today, we discuss where the gas market stands heading into the final months of the injection season and the implications for winter gas pricing.

After exceptionally mild weather nearly derailed the U.S. natural gas market earlier this year, the gas supply/demand balance is set to end the 2016-17 withdrawal season relatively bullish compared to last year. Storage is finishing the season more than 400 Bcf lower than last year, albeit still 260 Bcf/d above the 5-year average. In addition, gas exports are continuing to ratchet higher. The April 2017 CME/NYMEX Henry Hub natural gas futures contract expired Wednesday (March 29) at $3.175/MMBtu, nearly $1.30 (67%) higher than the April 2016 contract settlement of $1.90/MMBtu and also about 55 cents higher than the March 2017 contract settlement. Yet, with the storage inventory still higher than the 5-year average and production growth on the horizon, the market remains susceptible to downside risk if incremental demand doesn’t show up. In today’s blog, we look at potential supply/demand scenarios for injection season.