Working natural gas inventories have been building at a slow rate through the injection season thus far, and while the deficit to the year-ago level has been trimmed by weekly comparisons that have mostly outperformed the prior-year injections, comparisons to the five-year average show a tightening of the supply/demand balance that is sparking support for the bulls.
For the first week of cooling season that covered the week to June 2, the U.S. Energy Information Administration reported a net 106-Bcf injection that was 12 Bcf above the five-year average build, but inventory improvements in the subsequent nine weeks of the injection season saw only one additional week of injections above the five-year-average.
With the latest injection of 28 Bcf reported for the week to Aug. 4, the total working gas supply improved to 3,038 Bcf. With its comparison to a year-ago build of just 24 Bcf, the year-on-year storage deficit was trimmed to 275 Bcf, while compared with the 54-Bcf five-year average injection, the five-year-average storage surplus shrunk to just 61 Bcf.
Degree-day data typically supports some expectation for demand during review weeks and shows that for most weeks, cooling degree days this season have exceeded normal levels, providing underlying support for the eroding surplus to the five-year-averages.
However, some surprising regions are driving the weekly demand totals. In a typical summer, the Northeast and central U.S. experience weather that drives up power-sector consumption and reduces flows to storage. For the summer 2017, however, the eastern half of the U.S. has seen a mix of temperatures ranging from much below average to above average with only a few areas seeing temperatures that were much-above to record-above levels in July. Data from the National Oceanic and Atmospheric Administration shows that the West has seen above-average temperatures with some large segments of the region seeing record levels through July.
Despite the mostly mild weather through the cooling season thus far, degree day data shows cooling degree days have outperformed the regional normal. Surprisingly however, it is the West that has driven much of the overall demand for cooling this season. The West has outperformed its own regional number as well as bested the Northeast in number of cooling degree days through the majority of the summer season.
So far this summer cooling season from June through Aug. 2, degree-day data from the NOAA show that while the Northeast has outperformed the normal number of cooling degree days by a range of 5% to 32% in seven weeks and saw fewer than normal degree days in three of the review weeks, the Pacific region had only two weeks when degree days were lower than normal and eight weeks when cooling degree days swelled above normal within a range of 15% to as much as 46% above.
Weather outlooks for the weeks to Aug. 23 suggest some improvement in the weekly storage injections compared to year-ago and five-year average levels. More of the country will experience below-average temperatures, with above-average temperatures in areas of the Northeast, north central and West that could still support cooling demand. As a result, analysts currently expect builds in the coming weeks will beat year-ago levels but continue to trail five-year averages.
Starting the cooling season with a total working gas supply that was more than 230 Bcf above the five-year average, the erosion of the surplus is supportive for prices.
"A declining surplus confirms the market is becoming tighter on a seasonally adjusted basis, [which] often translates into rising prices over the intermediate term," Citi Futures analyst Tim Evans said.
However, the period between May 12 and Aug. 4 has been a clear counter-example, the analyst said.
Prices during that period flew in the face of the diminishing surplus with the market reaching a five-month low of $2.774/MMBtu on Aug. 4.
Ahead of the Aug. 10 storage report, Evans said that perhaps the market had finally fallen to a level where it could again gain traction from the declining physical surplus.
September natural gas added 6.1 cents on Wednesday, Aug. 9, to a settle at $2.883/MMBtu. Following the data's release on Thursday, bulls managed to drive the contract back near $3/MMBtu to a $2.995/MMBtu high.
Some analysts question the sustainability of the upside given the weather outlooks.
"Despite the price action, I still think the market is going to have a hard time sustaining this rally," FX Empire analyst James Hyerczyk said.
"Overall, demand will be near normal due to much of the northern half of the U.S. being comfortable and lacking summer heat. Overall, national natural gas demand will be moderate," Natgasweather.com said.
Natural gas storage is expected to exceed 3,900 Bcf by the end of October, according to the latest EIA forecast. This will put total storage levels very close to the five-year average but well short of the record 4,045 Bcf at the end of the 2016 injection season.
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