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In This List

Bargain hunting drives natural gas futures higher despite weak fundamentals

Essential Energy Insights - September, 2020

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Bargain hunting drives natural gas futures higher despite weak fundamentals

NYMEX September natural gas futures turned higher Tuesday, Aug. 1, in bargain hunting at fresh lows and despite fundamental weakness. The contract settled the session with a 2.5-cent gain at $2.819/MMBtu, after sinking to a $2.761/MMBtu low.

Weather forecasts failed to bear out the day's advance, as the latest revisions to the six- to 10-day outlook showed below-average temperatures expanding to include the majority of the eastern two-thirds of the country. Only small portions of the southeast and the majority of the western third of the country should see average and above-average temperatures.

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The eight- to 14-day outlook was revised to include a smaller area of below- average temperatures that will center on the central U.S., the majority of the East and a portion of the west central U.S. should see average temperatures, while areas along the southeast coastline and the western quarter of the country should see above-average temperatures.

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Weather as forecast would limit demand support for natural gas, as the milder conditions should cut back on power sector consumption as customer demand for cooling is trimmed. However, as the price of natural gas declines, coal-to-gas switching could come into play and provide some demand support that could limit additional significant price erosion.

Still, as demand for natural gas sinks, the natural gas supply building process could improve after a sluggish injection season thus far.

Injections for most weeks since the onset of the rebuilding period have trailed historical averages, widening the year-on-year deficit and trimming the surplus to the five-year average.

The U.S. Energy Information Administration reported a net 17-Bcf injection into natural gas inventories in the Lower 48 during the week ended July 21 that was below market consensus that had called for a 27-Bcf build to stocks and was well below respective year-ago and five-year average injections of 20 Bcf and 47 Bcf. The build brought total U.S. working gas supply to 2,990 Bcf, or 302 Bcf below the year-ago level and 111 Bcf above the five-year average storage level of 2,879 Bcf.

The modest injection into natural gas inventories for the week to July 21 reflected a week that included the heaviest day for power burn thus far this injection season on July 20, when the power sector consumed more than 41 Bcf of natural gas for use in power generators.

But overall, the demand for natural gas for power burn from April 1 through July 25 averaged 27.1 Bcf/d, which is 7% below last year's consumption over the same period, the EIA said in a July 27 "Today in Energy" report.

Power burn is expected to sink should weather present as forecast, and weekly natural gas injections are expected to improve in kind.

Weekly injections into the working gas supply in the remaining weeks of injection season are expected to build the total working gas supply to near 4.0 Tcf. The EIA expects an end-of-October supply at 3,940 Bcf, while the American Gas Association expects a slightly smaller total close to 3.8 Tcf.

Citing an increase in demand predominantly resulting from an expected 0.5 Bcf/d increase in power-sector consumption as a result of coal-to-gas due to the low price of natural gas, Morgan Stanley analysts expect an end-of-October natural gas inventory of about 3.80 Tcf, revised down from 3.85 Tcf and below what they see as market consensus near 3.75 Tcf.

In day-ahead trade milder weather and declining load helped drive losses at most major delivery hubs for Wednesday product.

Bucking the wider downtrend, Transco Zone 6 NY traded about 5 cents higher to an index near $2.70, while Tetco-M3 added nearly 15 cents to an index near $2.05. At the Henry Hub, next-day gas traded about 10 cents lower to an index near $2.75, Waha slipped about 5 cents to an index near $2.65 and Chicago traded more-than-5-cents lower to an index near $2.70. At the SoCal Border, deals were nearly 5-cents lower to an index below $3.05, and PG&E Gate slipped about 5 cents to an index below $3.20.

Market prices and included industry data are current as of the time of publication and are subject to change. For more detailed market data, including power, natural gas index prices, as well as forwards and futures, visit our Commodities Pages.