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Market perception clips natural gas prices despite supportive fundamentals

Severalfailed attempts by natural gas futures to break past key resistance near$3/MMBtu is a factor of market perception that flies in the face offundamentals that appear increasingly supportive, according to analysts.

HenryHub natural gas futures broke past several key resistance points with strongfundamental support to near $3.00/MMBtu, but failed to break past the keyresistance level in its most recent attempts higher.

Themarket has been climbing since June, when rising temperatures sent natural gasdemand from the power-generating sector higher and when production reportssignaled steady or declining output.

Forthe five months prior this year, the Henry Hub spot price had averaged$1.96/MMBtu. By June 29, daily prices had climbed to $2.90/MMBtu. Gains carriedover into July as August futures climbed to $2.998/MMBtu on July 1.

"Themarket seems to recognize a tightening in the supply demand balance asinfrastructure disruptions and slowing pace of production have brought dry gasflows to year-to-date lows just as summer demand begins to pick up pace,"the American Gas Association said in the June 30 edition of its Natural GasMarket Indicators.

Drygas production through June generally fluctuated between 70 Bcf/d and 71 Bcf/d,though production and processing disruptions resulting from events includingflooding in West Virginia and an explosion at Enterprise Product Partners'processing plant in Pascagoula, Miss., brought dry gas production to 69 Bcf/dand its year-to-date low, the AGA said.

Averageproduction volumes in June are 1.4 Bcf/d below June 2015 at 70.5 Bcf/d.

Naturalgas demand in turn has been on the rise. The U.S. Energy InformationAdministration reported for the week to June 8 natural gas consumption for powerclimbed to 30.3 Bcf/d from 29.6 Bcf/d during the week prior. Demand from thepower sector climbed to 31.6 Bcf/d in the week to June 15, rose to 33.9 Bcf/dthe following week and climbed to 34.0 Bcf/d in the week to June 22, where itheld in the week to June 29.

Supplyand demand factors have limited natural gas storage injections through theinjection season thus far, with the last two injections for the weeks to June24 and July 1 coming in below market expectations and well below historicalaverages at 37 Bcf and 39 Bcf, respectively.

Whilethe markets were initially spurred higher by the injections, gains were shortlived and answered by strong selling that returned August futures back below$2.75/MMBtu in intraday trade on Thursday, July 7.

"Ithink we are in a state of denial," Price Futures Group analyst Phil Flynnsaid. "The market move is negative but that will change."

Themarket remains tethered to the downside by the overall health of natural gasinventories despite the lackluster injection season thus far. The total workinggas supply currently sits at 3,179 Bcf, or 538 Bcf above the year-ago level and599 Bcf above the five-year average storage level of 2,580 Bcf.

IAFAdvisors analyst Kyle Cooper suggests that, "Fundamentals are not asbullish as they were."

"Expectationsare for a build next week above 60 Bcf," he said.

"Tradersare speculating that next week's injection will be big. But I think they aregrasping at straws," Flynn said.

TheAGA noted, however, that winter strip pricing has not moved in conjunction withthe front-month on its runs higher, or much past $3.30/MMBtu to $3.40/MMBtu.

"Perhapstraders recognize that adequate winter supplies will be sufficiently availableat these price levels, despite short-term market movements," the AGAspeculated.

Fornow, supplies are robust even with falling production and strong demand, theAGA said.

Futurescould find enough strength to breach $3/MMBtu if the warm summer persists withnear-record flows of gas to power generation.

For more detailed marketdata, including our power,naturalgas and coalindex prices, as well as forwardsand futures,visit our Commodities Pages. To view detailed EIA Weekly Natural Gas Storagedata, go to our Natural GasStorage Page.