Memo from the natural gas bear to the bull: “It’s getting hot in the US South.”
Reply: “Yes, but it’s still chilly in the East, so I’ll take my chances!”
The tug-of-war continues on when exactly late spring in the United States will feel like late spring as the Energy Information Administration prepares to release another weekly natural gas storage report which is likely to show an abnormally low injection of the fuel.
At this time of the year, gas injections into storage should be averaging anywhere between 90 and 100 bcf, or billion cubic feet.
But a consensus of analysts tracked by Investing.com are forecasting a build of just 76 bcf for last week versus 104 bcf during the same week a year ago and a five-year (2016-2020) average of 82 bcf.
While the weather in the US Northeast is at a technically balmy level of 55 to 65 Fahrenheit (13 to 18 Celcius), winds are still chilly and nights can feel like late winter and early spring where heating is required.
Thus, the region with the largest number of homes and businesses heated by gas has been burning larger than usual volumes of the fuel at this time of the year, resulting in less-than-expected storage builds.
‘Localized Heat’ In South Not Enough For Gas Bears
NatGasWeather said the American and European weather models, that gas traders heavily depend on, “held a bearish US pattern” for Friday through May 25 that would see “only localized heat” over southern parts of the country.
The upcoming pattern is especially bearish starting this weekend through next week, when comfortable temperatures are to permeate the Midwest and East, the weather forecaster said in a report carried by industry portal naturalgasintel.com.
“The southern US becomes warm to very warm with highs of 80s to 90s” Fahrenheit, NatGasWeather said.
“The coverage and intensity of highs reaching the 90s over the southern US still isn’t expected to be as widespread as needed to intimidate through May 26.”
The odd thing is that while gas injections were expected to be unseasonably lower last week, temperatures tracked by data provider Refinitiv were near normal, with 64 TDDs, or total degree days, versus the 30-year average of 65 TDDs for the period.
TDDs are used to estimate demand to heat or cool homes and businesses and measure the number of degrees a day's average temperature is below or above 65 degrees Fahrenheit (18 degrees Celsius).
Weather On The Side Of Gas Bulls
Bulls and bears in natural gas have fought to get the storage numbers right amid the rather peculiar weather conditions of this spring, and the winner for five weeks now have been those long the market.
In three of those five weeks, the EIA reported sharply lower storage numbers versus analysts’ estimates, wrong-footing the bears.
The dividends for the bulls have been quite enticing. In April alone, gas futures on the New York Mercantile Exchange’s Henry Hub gained 12.7%, the most in six months or since October 2020.
Henry Hub’s front-month contract, June, itself has stubbornly stayed above $2.90 per mmBtu, or million metric British thermal units, since Apr. 29—within striking distance of the key $3 level.
Contracts from July 2021 through March 2022 all settled above $3 in Wednesday’s trade, keeping up the market’s bullish theme for impending summer through next winter.
Those shorting the market are still betting on outsize storage injections from end-May.
Gelber & Associates, a Houston-based gas markets consultancy, told its clients in an email on Wednesday shared with Investing.com:
“Towards the latter end of the forecast, starting from the week of May 21, 100 Bcf injections are expected to appear on the horizon.”
LNG Shining Too
Gas bulls, meanwhile, may be in for some luck from LNG, or liquefied natural gas.
LNG feed gas volumes this week stayed consistently near 11 bcf, far above year-earlier levels, naturalgasintel.com said. It added that both Asian and European demand for US exports of the super-chilled fuel was expected to hold strong through the summer cooling season.
European gas storage was depleted over a freezing winter and chilly spring, driving demand and higher prices for US LNG. Elevated needs in Europe are boosting prices—and near-term demand—in Asia as well, as traders pay up to attract shipments, according to analysts.
US LNG export terminals “are running at their operationally available and contracted levels and will continue to do so, with no economically driven cargo cancellations anywhere on the horizon,” RBN Energy LLC analyst Lindsay Schneider said Wednesday.
“Global gas prices are well supported by low storage levels in Europe, and it will take time to refill inventories, which means these high prices are not going away anytime soon."
Added Schneider:
“The upshot: US LNG will have a very different kind of summer than it did last year, when global prices were at historic lows and many US terminals saw more cargo cancellations than exports.”
Feed gas last month averaged 10.77 bcf per day, nearly 3 bcf/d higher a year ago, she said.
“As we progress into summer, the year-on-year delta will become even more pronounced. Barring any major operational issues, feed gas demand will stay around 11 bcf/d, which is the level needed for the terminals to produce at full capacity.”
The reliable LNG strength has in recent days helped offset forecasts for light weather-driven demand.
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.