Market Update: August 14, 2024

Published on August 14, 2024

Market Insights

This Week's Update:

Last Friday, natural gas forwards experienced bullish volatility throughout the pricing curve. The prompt month saw a $0.015 upward movement versus the previous day’s close, settling at $2.127/MMBtu. The 12-month strip increased $0.055 on the day, Cal ’25 was up $0.066, and Cals ’26 through ’30 increased between $0.02 and $0.06.

Fundamentals:

Natural gas production decreased slightly last week to sit at 100.9 Bcf/d on Friday.
Total demand was down 1.3 Bcf/d day-over-day last Friday, driven primarily by a 2.2 Bcf/d decrease in power burn demand. Res/com demand increased by 1.2 Bcf/d, and industrial demand increased by a mere 0.1 Bcf/d. LNG exports remain lower than max capacity, currently 12.7 Bcf/d.

EIA/Gas Storage: For the week ending August 2, 2024, the EIA reported an injection of 21 Bcf into underground storage vs. an estimated injection of 27 Bcf. Inventories are 3,270 Bcf, 248 Bcf or 8.2% more than the same period last year and 424 Bcf or 14.9% more than the 5-year average.

Weather impact:

The near-term weather outlook is calling for moderate to below-normal temperatures for the majority of the nation, before above-average temperatures return in the longer-term forecast.
DTN’s 16–30-day forecast shows a national outlook 24 CDDs above long-term normals, similar to last year’s late August and early September heat
As heat returns in the latter half of August, strong power sector gas demand could suppress national storage builds, reducing the storage surpluses that threaten NYMEX futures. However, there’s a 30% chance that Feature 09L, a disorganized band of thunderstorms in the southern Caribbean Sea, could develop into a tropical storm within the next week, keeping tropical threats elevated.
The recent 39 CDD reduction in the August forecast underscores the volatility and uncertainty of weather forecasts beyond the short-term window.

In short:

The NYMEX front-month contract briefly dipped to $1.882/MMBtu last Monday before rebounding above the key $2.00/MMBtu level. The bearish market sentiment was driven by the formation of Hurricane Debby and a sharp drop of 39 CDDs in August forecasts over the past eleven days, coupled with production figures nearing five-month highs.
Despite these challenges, August 2024 could see the smallest monthly storage build in two decades, thanks to strong power sector demand, low natural gas spot prices encouraging coal-to-gas switching (over 5.0 Bcf/d), record-high August LNG feedgas, and producers potentially reducing supply due to low prices. A sub-100 Bcf storage build for August is likely, which is crucial to reduce the current 644 Bcf storage surplus and prevent storage containment issues in the fall.
However, the market’s longer-term outlook remains bearish due to an oversupply, which could lead to price risks heading into 2025 unless a cold winter occurs. While tiny storage builds might offer technical support, low prices are necessary to keep excess supply off the market and support demand.
Speculator short positions are still higher than in early May, before a major short squeeze caused a sharp rise in NYMEX futures. Despite weak fundamentals, there’s potential for a similar price surge in the next 30-60 days, as seen last year when short squeezes in August and October led to significant price spikes despite oversupplied conditions.
All said, we are in a similar position to last week and now is still a great time for buyer’s to add to their gas portfolio. Fundamentally, we expect prices to remain tame until at least October (barring a non-fundamental, short position squeeze that could push prices to unsustainable heights), when storage will begin to decline and gas heating demand for Winter will increase

In Depth:

Near Term:

NYMEX futures have been highly sensitive to production trends during the 2024 injection season, with early August seeing prices rise to their highest levels since late February due to a heat wave. However, a drop in pipeline nominations suggested a 1.5-2.0 Bcf/d supply decline, alongside cooling demand, which helped drive a recovery rally that pushed the September contract above $2.00/MMBtu. With many natural gas producers signaling potential production curtailments, shut-in volumes could exceed 2.0 Bcf/d, possibly preventing deeper price declines and providing support for the front end of the NYMEX curve.
LNG feedgas demand dipped early last week, but August 2024 is still averaging a record 12.9 Bcf/d, surpassing previous August averages of 12.2 Bcf/d in 2023 and 11.0 Bcf/d in 2022. This strong demand could help reduce August injections and contribute to falling storage surpluses relative to last year and the five-year average. However, the threat of a major hurricane could disrupt LNG operations, as seen recently with Hurricane Beryl impacting Freeport.
The year-over-year storage surplus is expected to decline rapidly in August and September, potentially decreasing by approximately 1.5 Bcf/d over the next six weeks, which might support a price recovery. However, it remains uncertain whether the market will focus on the bullish trend of a tightening supply/demand balance or the bearish reality of a North American storage surplus still over 400 Bcf above last year’s levels.
Bullish fundamentals depend on prices staying low. If prices rise significantly, supply curtailments could be lifted, and coal-to-gas switching could reverse, loosening the supply/demand balance.
DTN’s 16–30-day forecast shows a national outlook 24 CDDs above long-term normals, similar to last year’s late August and early September heat. This could boost power sector natural gas demand and reduce storage surpluses, especially in the gas-heavy South Central region. However, the East Coast may experience cooler temperatures as the Madden Julian Oscillation progresses, and tropical storm risks remain high in the Main Development Region. The recent 39 CDD reduction in the August forecast underscores the volatility and uncertainty of weather forecasts beyond the short-term window.

30-45 Days:

The magnitude and duration of production curtailments could help reduce storage surpluses, but this will likely require persistently low regional spot prices. Key producers like EQT, Coterra, Chesapeake, and Comstock are projecting significant supply cutbacks, with EQT leading the way with 90 Bcf of shut-ins over the coming months. In Canada, similar reductions are expected, with Arc Resources, Canadian Natural, and Tourmaline all planning significant output declines. While these supply reductions may tighten the market, there is potential for a strong production rebound heading into the early heating season, especially with the in-service of the 2.5 Bcf/d Matterhorn pipeline.
Tropical storms, particularly during peak hurricane season, pose risks to any price recovery. Past storms, like Hurricane Beryl, have caused significant demand destruction and disrupted LNG operations, sending NYMEX prices below $2.00/MMBtu. The seasonal decline in demand, especially a 10-12 Bcf/d drop in power sector demand from late August into mid-September, will further pressure the market. LNG demand expectations have also dimmed, with delays in LNG Canada’s completion and the upcoming Cove Point LNG maintenance outage reducing demand for Marcellus supplies.
Despite these bearish fundamentals, there is potential for a price recovery later in the year. Historically, October Henry Hub spot prices have averaged at least $2.42/MMBtu, suggesting possible upside if the market avoids the most bearish conditions. The current wide spreads across the NYMEX forward curve, coupled with a potential short squeeze, could support a move higher, particularly if autumn oversupply concerns are mitigated.
Looking ahead to 2025, downside risks remain due to elevated storage levels, recovering production, and delayed LNG demand. Production is expected to surge as curtailments are lifted, deferred production comes online, and the Matterhorn pipeline releases more Permian supplies. On the demand side, delays in Exxon’s Golden Pass LNG facility and concerns about a potential economic recession could further weaken demand. Overall, the combination of strong supply and weak demand points to continued sub-$3.00/MMBtu risks for the NYMEX 2025 calendar strip.

Natural Gas Prices:

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For contracts expiring in next 3 months (or NMR):

Why buy now? – DRT for 12-Month contracts starting in Sep and Oct below:
General info regarding the start date: Sep and Oct both UP ~$0.021 /Therm since last week’s update.

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