There are two ways to look at the most recent natural gas storage report.
The 71 Bcf build reported May 26 by the U.S. Energy Information Administration came in slightly higher than expectations, which were in the upper 60 Bcf range. That paints a bearish picture for the market.
But the 71 Bcf injection also is the ninth reported build of this refill season that has come in below prior-year levels. That’s a point for the bulls.
Natural gas forwards markets, which saw the expiring June contract fall an average of 7.5 cents between May 20 and 26, apparently prefer to cuddle with bears, according to NGI’s Forward Look.
In fact, prices across the front half of the curve ended the week lower, with the Nymex June contract falling 9.4 cents during that time, July sliding 5.3 cents and the balance of summer (July-August) slipping 1.4 cents.
Other markets followed suit, with July averaging 4.1 cents lower and the balance of summer trading a few cents on either side of flat, according to Forward Look.
“Thus far during the ‘refill’ season, injections have been at the lowest level over the past five years,” according to analysts at Jefferies. “Only 332 Bcf has been injected into storage, well below prior-year levels of 622 Bcf, down about 47% year on year. This compares to the five-year average injection of 468 Bcf.”
Analysts at the global investment banking firm said they continue to believe injections will remain “subdued” throughout the summer as production continues to dwindle and Northeast bottlenecks remain.
Production, which has been in a steady decline since February, has been holding just above the 70 Bcf/d mark.
Meanwhile, exports to Mexico and increased power burn also will have a hand in the pace of storage refills this season, Jefferies said.
U.S. exports to Mexico have averaged 3.6 Bcf/d this past month, reaching a high of 3.8 Bcf/d on May 25, according to Bentek Energy.
The increased imports by Mexico this year may be an indication that the country’s production has continued to decline into the summer, which puts a high side risk to U.S. exports to Mexico this summer, the company said.
Power burn, meanwhile, has averaged higher than 2015 for much of this year, and that trend is expected to continue as gas prices remain on the margin.
“We now see Nov. 1 storage at 4.0 Tcf, down from 4.1 Tcf previously, just about 220 Bcf (about 6%) above normal levels,” Jefferies said.
Analysts at BMO Capital Markets agree that the slow start to the refill season could leave end-of-season inventories near five-year average levels.
U.S. working gas in storage is now at 2,825 Bcf, which is 37.4% above the five-year average of 2,056 Bcf, and 36.5% above last year's level of 2,069 Bcf.
But while all this should be supportive of prices, it appears surplus supplies are still weighing heavily on the market.
“NYMEX futures’ brief excursion back below $2/MMBtu suggests the market is having second thoughts about the industry’s ability to cope with surplus supplies this season,” PIRA Energy Group analysts said May 23, before June rolled off the board at $1.963.
“Though the largest weekly storage injections typically occur during the spring, when weather-related demand is at a low ebb, the recent acceleration in stockpiling has nevertheless reignited oversupply concerns.”
Weather forecasts aren’t offering much hope either.
After the week’s brief heatwave in the Northeast, it appears most of the country is expected to enjoy mild, springtime weather for the next few weeks.
While Texas and some other southern areas are forecast to see highs in the 80s and 90s, the level of demand stemming from those pockets is simply not impressive enough to create substantial natural gas demand.
“Most atmospheric indicators are not supportive of widespread heat spiking natural gas spot prices, and climate models continue to show outside of the next week that cooler weather should dominate through the ﬁrst two-thirds of June,” forecasters with Bespoke Weather Services said.
With those bearish indicators in place, Bespoke said it expected July, which traded at a nearly 19-cent premium over June on May 26, to retract in the coming weeks.
“Late in the month, we may see heat return, and once that forecast ﬂips, prompt-month natural gas prices may be able to rally, but until then, the expectation is we wander lower towards $2.”
The July contract fell as much as 5 cents ahead of the extended Memorial Day holiday, but bounced back before the close to settle in the black, which suggests the battle continues between short- to medium-term bearish weather patterns versus a tightening supply/demand picture and their impacts longer term, said the team at NatGasWeather.
“In fact, the next few builds of 80s Bcf very well could be the largest ones this shoulder season, highlighting much smaller builds vs. previous years that were well over 110+ Bcf under similar conditions,” NatGasWeather said.
“Therefore, if prices are able to hold ground until hotter temperatures arrive, short-term bearish weather sentiment could quickly fade once more impressive heat finally looks more promising. Although, the longer that takes, the more likely the markets are to get frustrated waiting.”
But the potential for storage to exit the injection season closer to historical levels does appear to factor into the back half of the curve, Forward Look data indicates.
The Nymex winter 2016-2017 strip rose 6 cents between May 20 and 26, while the winter 2017-2018 jumped 11 cents.
Gains were similar at other markets, which rose an average 6 cents for the prompt winter and 12 cents for the winter 2017-2018.