NatGas Prices Capitulate: Will Winter Supply Worry Spark New Rally?

 | Sep 07, 2018 16:30

Often with market rallies, the end can come sooner than investors think. In just a week, US natural gas suffered its worst losing streak in seven months, making a dramatic debut into negative territory from the summer's highs.

While it may still experience a price run-up from low inventories when winter heating kicks in, gas could also have higher-than-anticipated stock refills from the record production that has persisted most of this year. The latter could exert further pressure on prices, especially if there is a reading for more mild temperature, and cause headaches for investors holding bullish positions in the hope of a winter rally.

Between the two scenarios, the market likely “will continue to soften as temperatures ease over the next week” and summer heat moves further west from the key gas-consuming US East Coast, said Daniel Myers, analyst at Gelber & Associates, an energy markets consultancy in Houston.

h3 Booming Production Set To Continue/h3

Booming gas production will also have a chance to make a bigger mark on storage in the near-term, Myers wrote in a commentary on Thursday after the US Energy Information Administration (EIA) reported for the second week in row a gas inventory buildup above market estimates.

Utilities injected 63 billion cubic feet (bcf) of gas into underground salt caverns for the week ended August 31, after what was left from generating electricity to meet last week’s high air-conditioning demand.

Analysts had estimated an injection of 62 bcf for last week. While the excess reported by the EIA was modest, in the previous week the buildup was also higher than expected, at a two-month high of 70 bcf versus a forecast 64 bcf. More importantly, the latest inventory growth was almost near the five-year average of 65 bcf, a target not achieved till middle of August as record gas production was virtually matched by phenomenal air-conditioning demand due to sweltering heat.

h3 Winter Stockpile Caution May Be Exaggerated/h3

But some veteran gas watchers said the long-standing practice of ensuring winter stockpiles stood at or above five-year averages may not matter as much these days when abundant, cheap gas was flowing out of the country’s many shale oil fields.

Dominick Chirichella, analyst at the DTN-Energy Management Institute in New York, who has followed the gas market for 37 years, said:

“I am of the view that with even with total inventories projected to end the injection season anywhere from 15 to 20 percent below the so called normal or five-year average, the market may be discounting this data point.”

“The required inventory level heading into the winter heating season may be lower than what it (historically) has been,” Chirichella wrote in a note on Thursday, adding that the market could be at the cusp of a new paradigm in supply/demand, depending on how investors react to the first chilly days of the coming cold season.

h3 Longest Losing Streak For Gas Since February/h3

In Thursday’s session, October, the front-month gas contract on the New York Mercantile Exchange, settled down for a fifth day in a row at $2.772 per million British thermal units (mmBtu). It was the longest losing streak for NYMEX gas since early February.