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Natural Gas: Are Current Rallies In Thin Air, With No Storms And Colder Outlook?

By Barani Krishnan/Investing.comCommoditiesAug 11, 2022 05:45AM ET
www.investing.com/analysis/natural-gas-are-current-rallies-in-thin-air-with-no-storms-and-cold-receding-200628372
Natural Gas: Are Current Rallies In Thin Air, With No Storms And Colder Outlook?
By Barani Krishnan/Investing.com   |  Aug 11, 2022 05:45AM ET
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  • Fundamentals evolving toward a looser supply/demand situation
  • Despite colder outlook, gas futures leaped some 8% in last two days
  • No signs yet of storms that usually add to supply fears

If it’s becoming increasingly evident that the fundamentals in natural gas are evolving toward looser supply/demand, then why does the Henry Hub remain so elevated?

Despite a much cooler temperature outlook for a large swathe of the United States, the hub’s front-month leaped some 8% over the past two days of trading, recovering all it lost in three prior sessions as bulls in the space sensed a buying opportunity at mid-$7 lows.

Natural Gas Daily
Natural Gas Daily

In Thursday’s pre-New York trade, the front-month hovered at above $8.25 for each million metric British thermal unit for a more modest weekly gain of about 3% following this week’s volatility.

From the summer demand perspective, the seasonal calendar is on the downside of the bell curve of summer heat. In support of this outlook, the major weather forecast models—namely the Global Forecast System (GFS) and the European Centre for Medium-Range Weather Forecasts (ECMWF)—have flipped to a much cooler temperature profile for the bulk of the United States over the next couple of weeks.

The GFS and the ECMWF represent the industry’s gold standard of forecast models and they even have Texas—the largest US gas-consuming state—in their outlook.

All summer long, gas bulls have used record hot temperatures as a primary reason to keep Henry Hub futures underpinned on the higher end of pricing.

In an email on Wednesday, analysts at Houston-based gas markets consultancy Gelber & Associates prodded their clients with a question they seemed to be asking themselves:

“Could it be that gas market bulls are so biased by their large long positions that they are ignoring the reality of advancing bearish drivers?”

Technical charts for Henry Hub’s front-month suggested the run-up could continue, says Sunil Kumar Dixit of SKCharting.com, adding:

“A sustained break above $8.50 will help Gas to reach $8.82 and test $9.42.”

Most gas bulls think Henry Hub pricing can go to $9 and above once the Atlantic hurricane season gets underway, with a steady stream of storms adding to supply concerns.

But in the tropics, overall action is still rather quiet, with some activity starting to percolate with a handful of disturbances in the cue. This includes the development of Invest 97L, which is located in the deep Atlantic southwest of the Cabo Verde Islands.

While at this point in time, there is nothing that could be construed as a meaningful concern, it does appear that the cap is about to come off the tropical season, which will open the door to a flurry of activity.

For natural gas, this creates 2 areas of risk:

  1. The potential for storm-related power loss should a large hurricane make a beeline toward a densely populated area of the United States. This season looks to be heavily slated toward storms taking aim at the Eastern Seaboard.
  2. If a hurricane develops in the Gulf of Mexico and threatens operations of coastal LNG export facilities, it would also have a bearish impact on the Henry Hub. However, at this point in time, it doesn’t appear that the market has factored in any demand destruction risk into gas futures.

Wednesday’s rebound on the Henry Hub gas came on the back of a twist in the Freeport LNG crisis—a saga dubbed by now in the market as the 'F-word.'

Under the headline F-Word Rattles Natural Gas Futures Again Despite No Change to Operations Plans, industry portal naturalgasintel.com remarked:

“It appears every time someone utters the word ‘Freeport’, the natural gas market gets itself into a tizzy. This time, though, the latest development in the wake of the LNG terminal’s explosion earlier this summer did nothing to alter its planned restart and thus should have had little influence over prices.”

What Freeport did say is that it has dropped the force majeure declaration it adopted after the June 8 explosion that idled about 2 billion cubic feet (bcf) of daily demand at the Texas-based liquefied natural gas plant. Gas futures lost an epic 33% in June over the Freeport saga, touching a bottom of just under $5.36 before recovering all of that and more by July.

According to Freeport’s original repair schedule, the plant should be out of commission at least until October. Wednesday’s removal of the force majeure did not provide any update on the start-up date. Yet, Henry Hub’s front-month jumped almost 37 cents on the day.

Naturalgasintel also cited a bullish development the market had missed:

“For example, wind generation has fallen to ‘very low’ levels as heat continues in the South Central United States. Power burns … spiked to 47-48 bcf on Tuesday, with wind generation expected to remain low through next week.”

The cooler weather pattern combined with rising dry gas production volumes—which continue to wobble around the 98 bcf per day area—is a recipe for weekly gas storage injections to come in larger than average over the next few weeks.

That brings us to the next big question of what the US Energy Information Administration is likely to report later for gas storage levels for the week ended August 5.

Natural Gas Storage
Natural Gas Storage

Source: Gelber & Associates

According to a consensus of analysts tracked by Investing.com, U.S. utilities likely added a smaller-than-usual 39 billion cubic feet (bcf) of natural gas to storage as hot weather boosted the amount of gas power companies burned to meet last week’s air conditioning use, a Reuters poll showed on Wednesday.

That injection, for the week ending Aug 5, compares with a build of 44 bcf during the same week a year ago and a five-year (2017-2021) average injection of 45 bcf.

In the week ended July 29, utilities added 41 bcf of gas to storage.

The injection analysts forecast for the week ended August 5 would lift stockpiles to 2.496 trillion cubic feet (tcf), about 12.1% below the five-year average and 9.9% below the same week a year ago.

According to Reuters-associated data provider Refinitiv, there were around 107 cooling degree days (CDDs) last week, which was much more than the 30-year normal of 88 CDDs for the period.

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 (18 C).

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.

Natural Gas: Are Current Rallies In Thin Air, With No Storms And Colder Outlook?
 

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Natural Gas: Are Current Rallies In Thin Air, With No Storms And Colder Outlook?

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Comments (10)
Heine Pedersen
Heine Pedersen Aug 11, 2022 1:32PM ET
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If you read SEC's definitions of manipulation.. This clearly fits.
Heine Pedersen
Heine Pedersen Aug 11, 2022 1:19PM ET
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This is absolutely disgusting. There hasn't been a a decline in the inventories since April. Someone has a hidden agenda. Probably getting out of certain stocks in a 'good way'. Because this makes no sense at all.
Joe Fred
Joe Fred Aug 11, 2022 10:47AM ET
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Mr Barani, great article. I live along the US Gulf Coast and those storms are about as predictable as the way prices will move lol. And it has been very, very warm lately with little rain and last night mother nature reminded us in a hurry how quickly things can change with high winds and 4” of rain at my home after 2-1/2 months of no measurable rain. Anyway, best wishes sir. I don’t always agree with you but i think that is what makes everyone better!
Barani Krishnan
Barani Krishnan Aug 11, 2022 10:47AM ET
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Thanks much for the wonderful perspective, Joe Fred. And you're right: we don't have to always agree with each other, but we should remain objective in our criticism and not biased. As you'll notice from today's thread here, this is easier said than done (with certain individuals). Thanks again for the inspiring words. It's readers like you who keep me going.
Barani Krishnan
Barani Krishnan Aug 11, 2022 10:34AM ET
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So, the print is 44 bcf, just 5 bcf above forecast. Now, the game begins. Will bears converge on this aberration on data or will the bulls be able to hold. So far, low on the day is 8.18 and it seems to be consolidating.
SunilKumar Dixit
SunilKumarDixit Aug 11, 2022 10:09AM ET
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Now that Nat Gas has breached $8.5 resistance, next leg higher $9.42 will be in focus. As long as prices sustain above $7.92 and $8.26 short term uptrend holds good.
Mahesh Parmar
Mahesh Parmar Aug 11, 2022 10:09AM ET
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Yes sirMy all trades are on chart basisI hold long on mcz at 655Hope I can get 700
Mahesh Parmar
Mahesh Parmar Aug 11, 2022 10:09AM ET
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Mr Barani, Satendra and you are solid on chartsGreat work by you all
Barani Krishnan
Barani Krishnan Aug 11, 2022 10:09AM ET
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Mahesh Parmar  Kindly tell that to Umair eg. He seems to have an obsession in trying to discredit Sunil. LOL!
Ivan Lazo
Ivan Lazo Aug 11, 2022 9:52AM ET
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Perhaps the calm before the storm? Winter is only 3 months away.
Barani Krishnan
Barani Krishnan Aug 11, 2022 9:52AM ET
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Yes, we are at a crossroads now on demand. The dark horse is still Russia-Europe, and how that whole political showdown impacts global gas pricing going into winter.
umair eg
umair eg Aug 11, 2022 8:38AM ET
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Wait I thought 8 50 would not break? LOL like I said your technical analysis is 🗑
Show previous replies (8)
Barani Krishnan
Barani Krishnan Aug 11, 2022 8:38AM ET
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Mahesh Parmar  Bests to you and your trades, and thanks for the vote of confidence in me and Sunil.  Wishing you a good weekend in advance, mate!
Mahesh Parmar
Mahesh Parmar Aug 11, 2022 8:38AM ET
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Barani Krishnan sir 700 on deskThanks to you and Dixit sir
Barani Krishnan
Barani Krishnan Aug 11, 2022 8:38AM ET
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Mahesh Parmar  Ha ha ... happy for you, mate. It always feels great when someone makes money on your call. Bests again.
Barani Krishnan
Barani Krishnan Aug 11, 2022 8:38AM ET
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Mahesh Parmar  Read today's oil report. I have different views on oil compared to "Mr Phil", unfortunately :)  https://www.investing.com/news/commodities-news/oil-jumps-as-iea-sees-higher-demand-opec-hints-at-cuts-2870592
Mahesh Parmar
Mahesh Parmar Aug 11, 2022 8:38AM ET
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Barani Krishnan sirFrom heart I do few trades I shortedAt 7500 at closing time hope I will wait for 7200 at stoploss 7650
umair eg
umair eg Aug 11, 2022 8:38AM ET
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Wait I thought 8 50 would not break? LOL like I said your technical analysis is 🗑
Abdelraziq Abuaisha
Abdelraziq Abuaisha Aug 11, 2022 5:57AM ET
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I think we are about to see something unique dear writer, a recession in which the prices of energy rise. That is contrary to basic economic understanding; because the economic theory suggests prices of energy decrease with recession, but we are in very tight supply cycle. Till now it still a note under watch :)
Barani Krishnan
Barani Krishnan Aug 11, 2022 5:57AM ET
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True. Abdelraziq. We'll just have to see how it pans out.
David Willey
David Willey Aug 11, 2022 5:55AM ET
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Thank you
Barani Krishnan
Barani Krishnan Aug 11, 2022 5:55AM ET
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You're most welcome, David. Thanks for being a reader.
 
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