On what is typically a sleepy day in natural gas trading, Friday proved anything but as the front of the futures curve skyrocketed. Once the smoke had cleared, the September contract had surged 17.4 cents higher to $2.356, while October shot up 17.1 cents to $2.495.

Evening markets

Spot gas prices also rallied as sweltering heat stoked $2-plus gains in California. NGI’s Spot Gas National Avg. jumped 14.0 cents to $2.205.

With cooler weather outlooks for most U.S. regions outside the West, slightly higher dry gas production figures and a dip in liquefied natural gas (LNG) feed gas demand, futures market observers were perplexed at the pace of Friday’s rally.

“I’m not getting sense of any real fundamental reason for September and October to be up over 17 cents,” said broker Steve Blair of Marex North America LLC. He said it would be interesting to see how much more length the managed money sector may put into the market after the Commodities Futures Trading Commission data was released Friday.

Taking a look at the technicals, the daily, weekly and monthly charts indicate that prompt-month prices are trending “right at the line of resistance,” Blair said. “So the rally doesn’t surprise me on a technical level. But can we close above these numbers? I would imagine if we can move past these levels, that would likely invite even more length from the managed money sector.”

Some traders may have been looking ahead to stronger LNG exports in the coming months, while others could be viewing the latest turn in the weather models as a temporary “blip” in an otherwise supportive environment, he noted. However, NatGasWeather cautioned the supply/demand balance still remains “too loose.”

NatGasWeather pointed to Thursday’s weekly government storage report that increased the surplus to the five-year average to a hefty 443 Bcf. The overhang to year-ago levels also expanded slightly, to 608 Bcf from 601 Bcf, with total stocks sitting at 3,332 Bcf.

Genscape Inc. said the reported Energy Information Administration (EIA) data, indicating a 58 Bcf injection, appeared loose versus the five-year average by 0.15 Bcf/d. Total production during the reference week decreased from a week earlier by 0.2 Bcf/d, according to the firm, while South Central demand was down 0.6 Bcf/d from maintenance in the Permian Basin.

Mountain production increased 0.4 Bcf/d as associated gas production continued to rise with producers turning shut-ins back online, Genscape said. Total power demand dropped 3.6 Bcf/d, mostly in the East, where Hurricane Isaias hit early in the week. Midwest power demand also dropped by 1.5 Bcf/d, while total residential/commercial demand fell 1.2 Bcf/d. 

Mobius Risk Group said the next EIA storage report should show some contraction in the year/year surplus, but the small salt storage build in the latest report for the South Central region, where salt facilities added 1 Bcf, is “a notable headwind.” The possibility of another small build being reported in the next report is another.

“The same two weeks last year posted a cumulative salt withdrawal of 14 Bcf,” Mobius said.

That’s one of the many reasons Friday’s rally caught some market participants by surprise, NatGasWeather said, “especially bears that were forced to cover,” with supplies still set to increase to 4 Tcf by the end of the refill season. Furthermore, after the recent rally, “there’s likely to be lost natural gas demand to other cheaper energy sources to potentially increase end-of-season estimates further to more than 4 Tcf.”

Tudor, Pickering, Holt & Co. (TPH) analysts noted another major headwind that doesn’t appear to be circulating through the market yet. When it comes to the recovery in global gas demand that many U.S. market observers are banking on to drive a meaningful rally in domestic prices, they may not be considering one important piece of the puzzle, they warned.

“Ukraine is clearly acting as a spillway for excess volumes, exemplified by the exponential storage trajectory,” TPH analysts said. “With a capacity of around 1.1 Tcf, Ukraine’s capacity is larger than any of the European Union (EU) nations and, at 76% full, there is still plenty of room to absorb surplus molecules before the end of injection season.”

To put the impact in context, adding Ukraine’s storage surplus over last year to current EU storage, the market would be at 95% of capacity, with two and a half months of injection season still to go.

“Ultimately what this means is we’re going to enter winter with EU storage at capacity, an incremental 1.2-plus Tcf in the Ukraine and an armada of floating storage awaiting the seasonal demand boost,” said the TPH team. “Simply put, with such a large storage overhang, our supply/demand balances suggest material LNG curtailments again next summer, which isn’t currently being priced into global arbs.”

Strong Cash

It may be starting to cool off on the East Coast, but it’s still summer in Texas and California, where triple-digit temperatures drove more gains for cash markets on Friday.

Katy hub prices were up 12.5 cents to $2.300, and NGPL S. Texas was up 14.0 cents to $2.220.

California experienced another day of wild gains, with prices at SoCal Citygate jumping $2.190 to average $6.655. PG&E Citygate climbed 35.0 cents to $3.305, while in the Rockies, Northwest Sumas shot up 26.0 cents to $2.380.

Spot gas prices also were strong in Louisiana, where benchmark Henry Hub posted one of the smallest gains in the region as it tacked on 9.0 cents to hit $2.210.

Appalachia prices were mixed but mostly shifted within a nickel of Thursday’s levels, while farther east, Algonquin Citygate cash plunged 21.5 cents to $1.270.