Natural Gas: Hotter-Than-Average U.S. Heat Solidifies $6 Pricing
Barani Krishnan | Jul 14, 2022 17:33
- Rising summer heat forms a solid base for gas pricing in the higher $6
- If the upside holds, gas charts indicate the first breakout to $6.80 and $8 later
- Freeport LNG outage makes less of a difference as utilities burn gas burns, mopping up lax supply on the market.
Creeping summer heat has solidified US natural gas pricing in the high $6, a relief to bulls trapped in a free-falling market just two weeks ago.
On June 8, an explosion rendered the Freeport LNG plant on the Texas Gulf Coast inoperable until October, significantly reducing US demand for natural gas. Prior to the accident, the plant accounted for around 20% of all US liquefied natural gas processing, consuming up to 2.1 billion cubic feet of natural gas per day.
Gas unused by the plant had been piling since, sending the most-active futures contract on New York’s Henry Hub crashing from a 14-year high of $9.66 to a 14-week low of $5.32. However, since the week ended June 24, the tide in pricing has turned, with the Henry Hub’s front-month rising 15%.
Ahead of Thursday’s open in New York, the front month was at $6.63, with charts indicating a breakout to $6.80 and $8 later.
Sunil Kumar Dixit, chief technical strategist at skcharting.com explains:
“The upside will be capped by the 50-Day Exponential Moving Average of $6.90, but if it gets beyond that, then the range is likely to break on the upper side aiming for $8.0 and $8.85.”
The rebound in gas pricing came as temperatures swiftly rose over the past two weeks, prompting Americans to crank up their air-conditioners more than ever since the start of this summer.
Reuters-associated data provider Refinitiv said there were around 95 cooling degree days (CDDs) last week, more than the 30-year normal of 83 CDDs for the period.
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CDDs estimate demand for cooling homes and businesses by measuring the number of degrees a day’s average temperature above 65 degrees Fahrenheit.
The spike in cooling demand correspondingly boosted gas burns by utilities, mopping up much of the lax supply on the market.
A spate of maintenance-related disruptions earlier this week has further tightened supply, with trade journal naturalgasintel.com reporting that national output fell below 94 billion cubic feet on Tuesday—from recent highs near 96 bcf—and did not budge in Wednesday’s estimates. This raised concerns about supply/demand imbalance as summer heat slowed and showed little signs of abating.
More importantly, it also renewed focus on gas-in-storage: whether the five-year average for this will hit a deficit of 300 bcf, as widely anticipated months ago.
Forecaster NatGasWeather said in a report that the next two weeks would likely “remain hot and bullish, especially July 17-26.” For that period:
“Hot high pressure will rule most of the US, with highs of the 90s to 110s for strong to very-strong national demand, including dangerous heat [in the Southwest and parts of Texas].”
Forecasts call for continued lofty temperatures through July and into August, following a record hot June across swaths of the Lower 48.
Eli Rubin, EBW Analytics Group’s senior analyst, commented:
“As the heat intensifies in late July, further upside amid volatile conditions appears the most likely outcome.”
Away from the United States, demand for US LNG is also keeping a firm base for $6-and-above pricing. Feed gas volumes at LNG plants have held above 11 bcf per day throughout July, effectively leaving American liquefaction operating at full capacity, except for Freeport.
With Russia playing cat-and-mouse with Europe over the suspended Nord Stream 1 project, the EU is calling for all the LNG it can get this summer.
Rystad Energy’s analyst Nikoline Bromander said:
“Europe is on edge, and the region is counting down the days until Nord Stream 1 is scheduled to return to its already sub-optimal operational level.”
He added that the continent “needs supplies now to build up its stocks before” winter. Reiterating that:
“Ample uncertainty surrounding Russian supplies remains amid persistent fears of the continent running out of gas during the heating season.”
Ahead of Thursday’s weekly gas storage report from the US Energy Information Administration, analysts tracked by Investing.com have predicted a larger-than-usual 58 bcf storage build for the week ended July 8.
If accurate, the build would far exceed the storage injection of 49 bcf during the same week a year ago and a five-year (2017-2021) average injection of 55 bcf.
In the prior week, utilities added 60 bcf of gas to storage.
The injection analysts forecast for the week ended July 8 would lift stockpiles to 2.369 trillion cubic feet, about 11.9% below the five-year average and 9.6% below the same week a year ago.
Houston-based gas markets consultancy Gelber & Associates said that:
“[Last week’s unexpectedly low storage injection] has the market fearful of a repeat event which places doubt on increased storage injections resolving market tightness heading into winter.”
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 positions in the commodities and securities he writes about.
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