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As the end to what could be the worst quarter in the history of natural gas trading looms, longs grimacing over the 50% loss or thereabouts since the end of December should look at just one number that got them here.
And that number is 1.9 tcf. It stands for the 1.9 trillion cubic feet of gas held in underground caverns, mostly in the U.S. Midwest, which acts as storage for the fuel that utilities burn for power generation, heating and cooling.
At the risk of oversimplifying, the storage is the alpha and omega of the gas market. Even the famous line attributed to Sherlock Holmes, “elementary, my dear Watson … elementary” (which Sir Arthur Conan Doyle himself never authored) might apply. But without that too, you get the idea: It is what it is.
The current gas inventory is the highest in recent memory and remains the bane of bulls in the market who’ve been trying to restart a spectacular rally they enjoyed just before the unusually warm 2022/23 winter season that led to less-than-typical need for heating. Excess gas supply naturally went into storage.
The weather, of course, isn’t the only thing to blame here. One of the unexpected twists to gas trading over the past nine months has been the disruption to the operations of Freeport LNG in Texas, which used to be a stable source of 2 billion cubic feet of daily gas demand. After a fire in June knocked out the plant that liquefies natural gas for export, its restart has been agonizingly slow, reaching 1.7 bcf/per day Wednesday versus an original capacity of nearly 2.4 bcf/d.
While the outage at Freeport put a ceiling on LNG shipments, substantial new gas liquefaction capacity is being built on the U.S. Gulf Coast of Mexico to provide over 50 million tonnes per annum of new exports. But that won’t arrive until 2025, and, until then, the market needs to take care of the storage at hand.
Houston-based energy markets advisory Gelber & Associates said in a note issued Wednesday:
“A storage surplus of about 20% is already realized and to reduce the current storage surplus to the 5-year average would be a tough task.”
“Multiple months of bullish demand in the market and a subsequent shift to a much tighter supply/demand balance would likely be necessary, but that is unexpected in the current market.”
As of the close of March 17, gas in storage was 36% higher than a year ago and nearly 23% higher than the five-year average.
Gelber is forecasting gas inventories to drop by just 100 bcf from current levels to reach 1.8 tcf by the end of the withdrawal season — which coincides with moderate spring weather, when producers would be doing net injections to storage.
It wouldn’t be far-fetched to expect inventories of well over 2 tcf before meaningful declines come again in the form of summer cooling demand.
Emily McClain, vice president of gas markets research at Rystad Energy, said in comments carried by industry portal naturalgasintel.com:
“There is some potential upside to prices as Freeport LNG advances feed gas deliveries and subsequent LNG exports in the coming weeks.”
But the crux of the matter was storage, storage and storage as lackluster heating demand kept gas pulls low throughout the withdrawal season, McClain said.
“An extension of the recent winter season’s trend of steady gas production alongside persistent mild weather driving sustained declines in demand for heating,” she added.
As of Wednesday’s settlement, the front-month April contract on New York Mercantile Exchange’s Henry Hub stood at $1.991 per mmBtu, or million metric British thermal units. April’s last trading day would be today, after which it would be replaced as front-month by the May contract.
With much of the volume having already moved to the May contract in recent days, Investing.com already recognizes it as the most-active contract with an official price of $2.130 as of this writing.
That’s still a far cry from the 14-year high of $10 seen in August and the $7 peak noted as recently as December.
Until there was a marked improvement in both technicals and fundamentals of gas, the May contract could slip to below $1.80, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.
“Weakness below $2.10 will expose natural gas back to the $2 support and the swing low of $1.967, that could bring a further drop to $1.76.
As long as prices sustain above $2.10, we can witness a short consolidation of fresh longs initiated from support areas and reach immediate resistance at $2.27.”
Ahead of today’s weekly inventory report from the agency at 10:30 ET (14:30 GMT), a Reuters poll suggested that U.S. utilities likely pulled a larger-than-usual 54 bcf, or billion cubic feet, from storage for the week to March 24 helped by some lingering cold after the official end to winter on March 20.
In the previous week to March 17, utilities pulled 72 bcf of gas from storage.
If correct, the latest draw would be larger than the 15-bcf pull during the same week a year ago and the five-year (2018-2022) average decline of 17 bcf.
The forecast for the week ended March 24 would cut stockpiles to 1.846 tcf, barely changed from the week ended March 17.
There were around 131 heating degree days (HDDs) last week, which was more than the 30-year average of 117 HDDs for the period, according to Reuters-associated data provider Refinitiv.
HDDs measure the number of degrees a day's average temperature is below 65 degrees Fahrenheit (18 degrees Celsius) to estimate demand to heat homes and businesses.
Swings in weather were expected to prevail before balmier spring conditions set in, NatGasWeather said in a forecast that ran on naturalgasintel.com.
A “mix of cool shots and warmer breaks will propagate across the U.S. March 31-April 11 for swings between light and moderate national demand,” the forecaster said. It added that on overall, “highs will generally be in the mid-30s to 60s across the northern U.S.,” while the South “will be nice with highs of 60s to 80s besides locally hotter 90s for very light demand.”
Cool conditions that lingered in the far northern Plains and Rockies at midweek are expected to keep furnaces cranking overnight into Thursday. Seasonally cold air could permeate some far Western markets as well.
However, NatGasWeather said mild temperatures across much of the South, Midwest and East were expected to provide an offset and leave overall demand modest moving into early April. Heating demand could then steadily fade, moving farther into the next month.
At the same time, the forecaster noted that production has held around 100 bcf/d this week and much of the year to date – near record levels – raising concerns that supplies could far surpass demand as spring weather arrives.
***
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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