- Hottest weather pattern of 40 years emerging, signaling more power burn
- But gas keeps trading sideways, dynamically positioned at $2.65
- Gas storage “reclassifications” also obfuscate market optics for bulls
Call it the “Crazy July”.
One of the hottest summers in the memory of natural gas traders descended upon us this month. And, with just days to August, it hasn’t given up yet.
NatGasWeather said the Lower 48 U.S. states would see “the hottest pattern of the past 40-plus years” through the remainder of this trading week.
In a blog carried by industry portal naturalgasintel.com, the forecaster said scorching heat in the triple-digit Fahrenheits was expected to pepper a vast swath of the country, from California through the Southwest to Texas.
Concurrently, parts of the U.S. Plains and Midwest would be enduring highs in the upper 90s, with similar temperatures along with heavy humidity on the East Coast, NatGasWeather said.
“To be sure, near-term weather is bullish,” naturalgasintel said with conviction.
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What isn't, of course, are gas prices that longs in the game say should be at $3 and above per mmBtu, or million metric British thermal units, from all that power burns related to air-conditioning demand that ought to be keeping up with that heat.
With just two sessions left before August, the front-month gas contract on the Henry Hub of NYMEX, or the New York Mercantile Exchange, is trapped in that maddeningly familiar mid-$2 territory that has become the bane of gas bulls since the start of the year.
At one point in late June, the market got to around $2.90, marking the loftiest level for a front-month contract on the Henry Hub since March.
But the momentum couldn’t last beyond days, leaving prices in the $2.50 to sub-$2.80 range since.
“Natural gas futures keep trading sideways, fluctuating around the daily Middle Bollinger Band dynamically positioned at $2.65,” said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.
Consolidation above this zone will eventually extend the upward move towards $2.76 and $2.84, followed by the psychological $3 handle, Dixit said, adding:
“Interim support at the 50-day EMA, or Exponential Moving Average, is dynamically positioned at $2.56 to keep momentum intact, while weakness below this zone will call for further drop to 100-day SMA, or Simple Moving Average, of $2.40.”
John Sodergreen, who publishes a weekly note on gas under the heading of “The Desk”, said July will be remembered for a “few, very big fundamental themes, or pivots, if you will.”
“The heat, of course, has been off the charts. Regional flows have been significantly skewed and re-skewed by a variety of factors, from Canadian imports to regional heat-related demand to early-month lack of LNG feed demand. Now, however, LNG is back in the record-level range, as we ease out of July.
And production, while still tickling higher ranges, is on the cusp, we believe, of an accelerated trip lower. All in, the south-central has been playing an altogether different game this season. And, the fun should continue, given some early demand forecasts for domestic use and exports.”
But the July story for gas remains one that’s deeply embedded in uncertainty — and controversy.
A so-called “reclassification” of gas storage by the Energy Information Administration has been a major reason that longs in the game have been unable to achieve the right market optics to push prices higher.
Said Sodergreen, commenting on this:
“Once again this week, all eyes are on the south-central region, salt storage to be specific. It’s been a tough nut to estimate there these past five to six weeks. We’ve seen reclassifications. We’ve seen consistently lower-than-expected builds. Or, as with last week, a wee draw. Current levels in salt and nonsalt storage are wildly higher than averages and ranges.”
“Last week’s 2-bcf draw from salt storage was also wildly lower than the same period last year when a 15-bcf draw was reported.”
U.S. utilities likely added a below-normal 19 billion cubic feet, or bcf, of gas to storage last week, according to a consensus of forecasts by industry analysts tracked by Investing.com.
That forecast for a 19-bcf injection compares with an 18-bcf injection during the same week a year ago and a five-year (2018-2022) average increase of 31 bcf.
If correct, the forecast for the week ended July 21 would lift stockpiles to 2.99 trillion cubic feet, or tcf — 23.9% above the same week a year ago and 13.2% above the five-year average.
In the prior week to July 14, utilities added 41 bcf of gas to storage.
Refinitiv, the data arm of Reuters, said hotter-than-usual weather caused power generators to burn more gas last week to keep air conditioners humming. It reported around 105 cooling degree days, or CDDs, last week, which was higher than the 30-year normal of 89 CDDs for the period, data from Refinitiv showed. CDDs, used to estimate demand to cool homes and businesses, measure the number of degrees a day's average temperature is above 65 degrees Fahrenheit.
While weather data remains “impressively hot through Saturday,” NatGasWeather says outlooks show “national demand becoming only slightly stronger than normal” as mitigating weather systems sweep across the Great Lakes and northeastern U.S.
“In addition, there’s the potential for tropical systems into the southern or eastern U.S. in August” that could usher in cooler winds, NatGasWeather said.
“Essentially, there are many ways flaws in the hot upper ridge are exposed in August that could prevent widespread extreme heat. The August pattern is still likely to result in stronger-than-normal demand most days, just not exceptionally strong and why storage surpluses are likely to only decline slowly.”
Gas production, meanwhile, climbed to 99.8 bcf per day on Wednesday, up nearly 1 bcf/d from Bloomberg’s prior estimate. The increase followed Northeast maintenance events and put output back near the century mark.
Output has periodically dipped below that level amid repair events, sparking bulls’ interest, but each time this year it has bounced back and averaged around 101 bcf/d – near record levels.
Goldman Sachs Group analysts led by Samantha Dart said gas burns in July have proven “exceptionally strong” – about 1.4 bcf/d higher than a year earlier.
“In particular, we note this month’s outperformance in burns has correlated well with the hottest days in the period and, in particular, with the hottest period in Texas,” Dart said. “With current Texas weather forecasts remaining above average, we believe gas burn outperformance is likely to extend into early August.”
Demand for LNG, meanwhile, proved lackluster to start the summer amid a spate of maintenance projects at liquefied natural gas facilities. It fell to a recent low of around 11 bcf/d but had climbed to around 13 bcf/d to start this week – within 2 bcf/d of 2023 highs.
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Disclaimer: The content of this article is purely to educate and inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically 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.