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Storage Shortage, Growing Demand Put Pressure on June Natural Gas

Natural gas forward prices for June rose an average 6 cents from May 11 to 17 as weather forecasts for the second half of May leaned toward more widespread warmth, with weak pricing likely to incentivize more power demand. Meanwhile, a storage report that confirmed the market’s concerns about current deficits weighed on forward prices through the summer, according to NGI’s Forward Look.

Nymex futures led the way as the June contract picked up a nickel during that time to reach $2.859 as small gains made early in the week began to peel back only to be recouped Thursday following the Energy Information Administration (EIA) storage report.

The EIA reported its first triple-digit storage build for this injection season, a 106 Bcf build to inventories for the week ending May 11. The build was in line with market expectations, but market reaction to the news confirmed that current storage deficits were indeed a concern. The Nymex June contract settled Thursday at $2.859, up 4.4 cents on the day.

Total working gas in underground storage as of May 11 stood at 1,538 Bcf, versus 2,359 Bcf a year ago and five-year average inventories of 2,039 Bcf. The year-on-year storage deficit shrank week/week from minus 863 Bcf to minus 821 Bcf, while the year-on-five-year deficit narrowed from minus 520 Bcf to minus 501 Bcf, EIA data show.

Immediate market reaction to the storage news was rather muted. As the data rolled out at 10:30 a.m. ET, the June futures contract briefly traded as high as $2.811 and as low as $2.782 before returning to roughly the same $2.790-2.800 area it had traded in prior to the report. By 11 a.m. ET, June had climbed to around $2.820, up about a penny from Wednesday’s settle.

“We see the current storage optics as bullish, and think the market should be responding more to those optics than it seems to be based on relatively lackluster price action,” Societe Generale (SocGen) natural gas analyst Breanne Dougherty said in a client note late Thursday.

In calling for a more substantial price increase, Dougherty noted the start of the storage injection season was “heavily delayed” due to an extension of winter-like weather. “May was expected to see a record injection pace, but above-normal temps buoyed power generation and softened the pace,” she said.

SocGen’s end-of-October storage level has been consistently trending in the 3.55-3.65 Tcf range. And although it does not see this as a “precarious” level to start winter 2018-2019 season, it is near the historical low seen in 2014, and analysts think the curve is undervalued at that storage level.

“If the trajectory shifts above 3.75 Tcf, we could see more legitimacy to current prices, but right now there is no visibility on that level of net injection being achieved,” Dougherty said. At 1.8 Tcf, SocGen’s expected storage level at the end of May leaves a large injection requirement through the end of October.

From a storage optics perspective, the investment bank sees the next four months as most exposed to tightening sentiment. As production growth continues through 2018, “the market should get brought back to equilibrium and allow for even a shift back into a period of structural oversupply by exit 2018” under a normal weather scenario.

Before then, however, a strong summer demand picture should create even more bullish pressure for gas markets, SocGen analysts said. Total demand in April was 16% higher year over year as lingering cold weather supported strong residential/commercial (res/com) loads to the tune of +7 Bcf/d year/year (y/y).

However, it was more than just unseasonably strong res/com loads that provided the robust demand boost, analysts said. Mexico and liquefied natural gas (LNG) exports have both grown over the last year. At a combined 7.8 Bcf/d, April exports were up almost 2 Bcf/d from last year. Power generation was also up more than 1 Bcf/d y/y and industrial demand climbed almost 1 Bcf/d.

“Bottom line, there is very real structural demand growth that has been realized over the last year,” Dougherty said. “To date, data in May affirms that. Exports have averaged 8 Bcf/d, and power generation has surged (+2.7 Bcf/d y/y for May 1-17).”

As such, SocGen sees more upside than downside demand risk ahead. For example, the premium of global gas prices will support very strong utilization of U.S. LNG export capacity, and analysts expect growth toward a 3.8 Bcf/d average for LNG export feedgas (+0.3 Bcf/d from current trend).

Mexico exports are also expected to hold steady, with potential upside by the end of the injection season “if anticipated pipeline capacity can actually come onstream,” it said. Power generation should also see solid support. Over the last year, there has been 12-13 GW of additional coal capacity retired, and about a 15 GW increase in gas capacity, which is generally supportive of higher gas burns this year.

While Incremental renewables capacity has the potential to eat into some of the gas market share, analysts think the net effect is a y/y gas upside. Hot weather brings additional upside, and the company’s base case is for summer power generation to average a soft +0.8 Bcf/d y/y, but “we think a revision higher is likely given what has been observed thus far this May.”

Indeed, NatGasWeather forecasters said most of the country will be warmer than normal into early June. Based on the latest data, “we don’t see upcoming storage builds being much larger than five-year averages, essentially stalling deficits and not reducing them much further over the next three to four weeks.”

While mostly comfortable weather will linger across the northern United States with highs of upper 60s to 80s, the southern states should remain warm to hot with highs of 80s to lower 90s, locally 100s over the Southwest, NatGasWeather said.

“Essentially, even with record production, builds still aren’t going to be able to reduce deficits as much as the markets probably were expecting a few months ago. This really flips the script in our opinion, where now the onus is on production reducing deficits instead of weather patterns increasing them,” the forecaster said.

To be sure, Houston-based Mobius Risk Group on Thursday said the EIA reference period of May 12-18 has shown indications of warm weather and stronger power demand as market expectations for the next EIA storage report show the inventory change tumbling from +100 Bcf to +90 Bcf in the past three days.

Weather patterns may again become critical in a couple weeks, NatGasWeather said, where early June temperatures need to show highs of 90s rapidly gaining ground over the South and East to highlight the threat that a hotter than normal summer is real.

Mobius analysts said it is worth noting that “the past six and a half months have posted a degree total (heating and cooling) within 1% of normal, and dry gas production growth of more than 4 Bcf/d, and yet the year/year storage deficit has still widened by approximately 600 Bcf.” With 25 weeks left in the traditional injection season, it would require an average deficit reduction of 33 Bcf per week, analysts said.

TransCanada Mainline Points Surge

Taking a closer look at regional markets, most pricing locations followed the Nymex closely, with increases of 5 cents or so through the summer months and then smaller gains further out the curve. Points along the TransCanada Mainline, meanwhile, posted much stronger gains as hot weather and seasonal maintenance events created some volatility for some of those price points.

For example, Emerson June forward prices shot up 26 cents from May 11-17 to reach $2.609 as temperatures in Minnesota during the second week of May soared to more than 10 degrees above normal, reaching a high of 82 Friday in St. Paul. The rest of the Emerson curve posted increases that were much more in line with the Nymex strip, with July climbing 6 cents to $2.425, the balance of summer (July-October) moving up 4 cents to $2.88 and the winter 2018-2019 inching up 2 cents to $2.85, according to Forward Look.

At Niagara, the entire forward curve posted sharp, double-digit increases. June rose 20 cents to $2.559, July was up 22 cents to $2.582, the balance of summer (July-October) was up 22 cents to $2.55 and the winter 2018-2019 was up 31 cents to $2.58.

The solid gains during the May 11-17 period come as hot weather has settled over the region in the past week and as maintenance events around the region are ongoing. For example, data and analytics company Genscape Inc. showed Lower 48 dry gas production down to around 76.4 Bcf/d on Thursday, after reaching close to 80 Bcf/d in recent weeks. The losses were largely concentrated in the Gulf of Mexico and Northeast, the latter of which could be creating some volatility at Niagara.

Meanwhile, there are ongoing restrictions on the Nova Gas Transmission Ltd. system that, despite briefly breaking on Thursday, are expected to continue through at least June and could be lending support to Emerson as the hot weather continued. AccuWeather was calling for temperatures to retreat back to seasonable levels over the weekend, with highs in the 60s and 70s in the forecast for the third week of May.

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