Market Newsletter – July 2019July 01, 2019
Summer has finally arrived; and with it, a flurry of recent market volatility, storms, potential system peaks, and intermittent blackouts. Perhaps it was the pleading voices of the bull camp eager to see cooling demand ratcheting up that led to the sudden and extreme heat; or perhaps the northeastern & midwestern tank-top enthusiasts have had their long-exalted prayers answered; it’s even possible that multiple airings of “The Sandlot” have forced Summer to rear her head. More than likely, however, it is a result of La Niña influences interacting with high-pressure atmospheric conditions to create a “heat dome” over much of the country. On the heels of speculative trading activity regarding the potential impacts of Hurricane Barry making landfall in Louisiana, natural gas futures prices have risen and fallen throughout July, but the Aug contract has remained range-bound to $2.25-$2.40 per MMBtu. There is a bit of short-term cooling relief anticipated over the next few days, which should help to keep a lid on any significant price rally. In contrast, the following weeks are likely due for some more extreme and extended heat to settle in once again across most of the country, and therefore we may see some technical resistance levels (currently around $2.30) being tested. This Thursday’s EIA natural gas storage report and the market’s reaction to the muted build should serve as a decent indicator for the price trajectory in the coming weeks.
On the subject of natural gas storage, we had a rather unusual instance occur last week. The report showed a build of 62 bcf, which was short of market expectations of around 65 bcf. While this injection continued to close the current inventory gap vs. the 5-year average, it was the lowest reported injection since the week ending April 5th. Still, the market moved down shortly after the release, a strong indication of the overall bearish sentiment. It is not unlike what we saw with Hurricane Barry’s potential impact – even though we saw a sell-off leading up to the storm due to fears of infrastructure damage, the price returned to the $2.30 level. That said, even though hurricane season generally has a bearish impact on natural gas, shut-ins (when production is capped due to extreme weather) have just occurred during our hottest stretch of the summer thus far. Combine this with elevated power sector demand in most of the country, and we’re looking at a much smaller storage build than what we’ve become accustomed to this upcoming Thursday, and potentially the smallest of the summer. This should continue to provide some price support to the August contract in the short-term. It’s possible we have a few more hurricanes that threaten the Gulf Coast over the next few weeks and even into October, in which case, we’ll see the market run up accordingly and test technical resistance levels. However, barring any major weather events or sustained heat waves, the remainder of injection season may just be one big bear hug, with the annual lows still ahead of us.
On the regulatory front, FirstEnergy’s battle to receive subsidies for two of their nuclear plants in Ohio has just been passed in the House by a single vote. The legislation creates a ratepayer-financed $1.1 billion subsidy. FirstEnergy will begin receiving $150 million/year, beginning in April 2021, though they had claimed the funding was needed immediately.