Market Update: July 29, 2024
This Week's Update:
The natural gas trading session on Friday was mostly uneventful. The August ’24 contract lost about four cents, settling at $3.01, and is set to expire today. The prompt month has lost roughly $0.12 over the last week and is close to falling below the $2/ MMBtu mark. Throughout the curve, there was little movement as well – Cals ’25-’29 were up one to two pennies.
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Fundamentals:
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Production, remaining steady around 102 Bcf/d, has been overall flat week-over-week
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Demand has pulled back about 5.0 Bcf/d from a week ago, stemming from lower power burn demand. LNG exports have climbed higher, back to over 13 Bcf/d, as Freeport volumes return to near full capacity.
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EIA/Gas Storage: For the week ending July 19, 2024, the EIA reported an injection of 22 Bcf into underground storage vs. an estimated injection of 18 Bcf. Inventories are 3,231 Bcf, 249 Bcf or 8.4% more than the same period last year and 456 Bcf or 16.4% more than the 5-year average.
Weather impact:
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Weather forecasts for the next two weeks indicate hotter temperatures will persist, with some potential relief heading into the second week of August.
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DTN forecasts a hot August, potentially surpassing July in cooling degree days, which could reduce storage surpluses and lift NYMEX prices. The market may be underestimating current August heat forecasts, offering potential moderate upside if heat materializes and weekly injections drop significantly.
In short:
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The August contract rose slightly last week due to a quicker-than-expected Freeport LNG recovery and an expected hot start to August, reversing the trend of declining weather impacts. However, weak Cooling Degree Days (CDDs) last week and the monthly rollover might delay any further rally.
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Last week’s EIA report showed a small 10 Bcf injection. Despite this being noise, Freeport LNG’s return and high August temperatures could result in the smallest August injection on record.
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Prices may rise, but risks remain mostly bearish: August heat could decline, tropical threats might reduce demand, pipelines could increase supply, and injection demand might drop.
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A major risk is speculators rebuilding short positions, which could trigger a significant NYMEX short-covering rally without fundamental reasons.
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Strong short-term market fundamentals and large storage draws may offer support, but medium-to-long-term risks from increased supply by Saudi Arabia, Russia, and North America could limit recovery chances.
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Similar trends to last week – The country is still in a good fundamental position for Natural Gas, keeping prices at bay and limiting future upside. Based on current outlooks, we foresee a likely scenario in which NYMEX prices rebound modestly in the immediate term but stay relatively cheap. Beyond the immediate term, we hold a slightly bullish outlook, believing that NYMEX prices will rise over the next 30-90 days, but not nearly to the extent that was once predicted due to weather – Storage surpluses should hinder pricing upside into the fall.
In Depth:
Near Term:
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LNG news turned positive, easing bearish fears and helping NYMEX futures rebound. Freeport LNG’s return, Corpus Christi’s pipeline recovery, and new demand from New Fortress LNG increased demand, reversing last week’s bearish outlook.
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Storage surpluses are expected to fall rapidly by the end of August, supporting near-term natural gas prices. Despite recent challenges, July 2024 may have the smallest monthly injection since at least 2000, and August may have an even smaller injection, indicating a tight supply/demand balance.
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DTN’s 16-30 day forecast shows above-normal cooling demand across the US, though South Central and Southeast heat levels are uncertain. The Madden Julian Oscillation and European models suggest a northern US ridging pattern, while wet soils in the South Central could affect forecasts. Hurricane risks may increase in late August.
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DTN forecasts a hot August, potentially surpassing July in cooling degree days, which could reduce storage surpluses and lift NYMEX prices. The market may be underestimating current August heat forecasts, offering potential moderate upside if heat materializes and weekly injections drop significantly.
30-45 Days:
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Supply risks remain significant in an oversupplied natural gas market. The bullish case hinges on the hope that the worst scenarios won’t occur, leading to a price rebound. This depends on producer restraint and limited Canadian supply. However, new pipelines in the Marcellus and Permian could increase production, adding to supply and potentially lowering prices.
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Weather, particularly hurricane risks, are critical. A hot August is needed to boost gas demand; without it, demand projections could fall. Hurricane Beryl has already shown bearish risks, with more tropical threats likely in the next 30-45 days.
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LNG demand might increase with LNG Canada and Plaquemines LNG, but recent bearish trends from Freeport LNG’s issues are cautionary.
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Despite bearish fundamentals, speculator short positions could trigger a price spike. The market has seen multiple short-covering rallies since 2023, and another could happen within 60-90 days.
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Historically, natural gas prices rise in October with the onset of heating demand. October prices have averaged at least $2.42/MMBtu since 2000. Storage injection appetite is low, potentially leading to price drops if supply remains high. And while current prices suggest a bearish outlook, early-season cold weather could lift prices modestly higher, as historical trends would suggest.
Natural Gas Prices:
For contracts expiring in next 3 months (or NMR):
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Why buy now? – DRT for 12-Month contracts starting in Sep and Oct below:
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General info regarding the start date: Sep down ~$0.012 /Therm.
For contracts expiring in 9-12 months:
Why buy now? – Gas 2025 renewals are back near Feb lows. The contract price fell $0.011/ Therm since the last update (7/22/24)