May natural gas futures extended gains to post a $3.347/MMBtu high Wednesday, April 5, but were unable to hold onto gains, slumping into negative territory before settling 2.7 cents lower at $3.266/MMBtu.
The market is meeting heavy resistance at the $3.34/MMBtu highs as fundamentals continue to suggest a weakening in demand and a rebuilding of the natural gas inventory through the shoulder season and summer to a healthy level ahead of the next winter heating season.
"Early gains were fostered by technical factors and the expectations that rising US LNG exports will lead to tighter storage levels in the second half of the year," Citi Futures analyst Tim Evans said.
However, near-term fundamentals suggest natural gas demand is likely to weaken as weather forecasts from the National Weather Service show above-average temperatures blanketing the eastern third of the country, as well as engulfing portions of the central and west in the six- to 10-day period. Large areas of average temperature are forecast in the central and west, while small areas of below-average temperatures are seen in Washington and Texas.
Meanwhile, while above-average temperatures pull back from portions of the Northeast, replaced by average temperatures in the eight- to 14-day period, above-average temperatures expand to encompass nearly the entire U.S.
With warming in major heat-consuming markets, demand for natural gas for heating is expected to continue to erode and lead into a long period where natural gas production will move into underground storage facilities to rebuild the natural gas supply before peak winter heating demand once again kicks in.
The natural gas supply fell through the 2016-2017 withdrawal season, reaching 2,049 Bcf, or 423 Bcf below the year-ago level and 250 Bcf above the five-year average storage level of 1,799 Bcf in the week to March 24, as lingering cold weather drove a 43-Bcf withdrawal for the review week.
Warming the following week trimmed heating degree days to 5.7% below last year and 18.9% lower than average, contributing to outlooks for the April 6 storage report from the U.S. Energy Information Administration, to outline a modest build to stocks for the week that typically ends the withdrawal season.
Traders and analysts looking ahead to the April 6 storage report that will cover the week to March 31 expect builds spanning 5 Bcf to 15 Bcf, while consensus is formed at a build of 9 Bcf. This will compare against a 13-Bcf five-year-average storage pull and the 6-Bcf injection reported for the same week in 2016.
With a build at consensus, the natural gas supply would improve to a total at 2,058 Bcf, and the year-on-year deficit would be trimmed to 420 Bcf, while the year-on-five-year average surplus would climb to 272 Bcf.
"We see the market becoming overvalued relative to current fundamentals and likely more overbought in terms of market composition," Evans said.
At day-ahead markets, cooler air prompting higher demand outlooks drove the price of natural gas higher at key hubs across the U.S. for product slated for delivery on April 6.
Transco Zone 6 NY traded more than 20 cents higher to an index near $3.15, Tetco-M3 gained more than 15 cents to an index near $3.10, Henry Hub traded about 15 cents higher to an index atop $3.20, Waha gained nearly 15 cents to an index near $3.00 and Chicago added nearly 10 cents to an index near $3.25. In the West, SoCal Border trades were higher by about 15 cents to an index near $3.00, while PG&E Gate gained about 10 cents to an index near $3.90.
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