Market Newsletter – July 2018July 01, 2018
Since the beginning of July, the price of natural gas has continued to move lower. The total amount of natural gas in storage facilities around the United States stands at 2.203 trillion cubic feet. Last year at this time, there was 24.8% less natural gas in storage, and the current level stands at 19.1% below the five-year average. While it looks like cooler weather is in the forecasts for coming days and weeks, and the natural gas injections may increase, the amount of natural gas continues to flow into storage at a meager rate this year.
With 17-18 weeks to go before the start of the peak season of heating demand where inventories begin to decline, we will need to see an average injection of 99.8-105.7 bcf each week, depending upon when the drawdowns commence, to reach the four trillion cubic foot mark. Last November, the high in stocks were at the 3.79 tcf level. To reach that point, natural gas will need to flow into storage at an average rate of 88.2-93.4 bcf over the next 17-18 weeks.
The bottom line is that inventories continue to build at a slow pace, despite record production which means that demand for the energy commodity is increasing both domestically and globally. The good news for the bear camp is that the ongoing trade war between the U.S. and China continues to threaten China’s status as one of the largest importers of U.S. LNG and is therefore adding some downward price pressure. Either way, natural gas has failed to eclipse the $3 mark and continues to move downward, with a potential test of the bottom end of its trading range ($2.75).
Even with the somewhat healthy injections we’ve seen (despite increased demand from C&I power burn and increased LNG export capabilities), natural gas is not making any progress in whittling down its significant storage deficit. This will not be a big issue if the upcoming winter is warmer than normal, or even normal. However, if the upcoming winter is much colder than normal, then parts of the country will run out of natural gas in storage and shortages will occur before the winter is over. This could cause a large rally in natural gas prices before the end of winter, if the winter is much colder than normal. At this point in time it is too early to know what the temperatures will be for the upcoming winter. Presently, this provides some nice (and unforeseen) buying opportunities to mitigate price exposure on any upcoming expiring supply contracts.