In a shocking move that appears to be based on more than pure fundamentals, natural gas futures surged as much as 35.5 cents on Monday, busting out of their previous trading range and closing nearly 17% higher than Friday. The September contract reached a $2.154/MMBtu intraday high before going on to settle at $2.101, up 30.2 cents day/day. October jumped 28.2 cents to $2.239.

Evening markets

Spot gas prices also moved considerably higher despite the cooler weather in store for this week, with NGI’s Spot Gas National Avg. climbing 20.0 cents to $1.790.

Nymex futures raced out of the gates early Monday, supported by hotter-trending forecasts for later this month as well as stronger liquefied natural gas (LNG) demand. September futures were up 6.0 cents at the open and continued to push higher throughout most of the session before a modest pullback ahead of the close.

“Clearly, a little tighter balance and hotter weather for mid-August aren’t worthy of a 35-cent-plus move when considering big cooler trends for this week shed nearly 30 Bcf, and with supplies already healthy and on track to reach nearly 4 Tcf,” said NatGasWeather. “As such, today’s gains are also being attributed to a massive short-covering rally.”

The latest Commodities Futures Trading Commission data showed that money managers have increased their bullish natural gas bets to 269,040, the most bullish in about 18 months. As The Schork Report pointed out, producers account for 71% of the bulk of the market’s net length.

There are plenty of reasons to be bullish natural gas, even though some analysts may view Monday’s action as a bit premature. After more than a week of trending cooler, weather models added back in heat for the two-week period beginning this weekend. The change was strongest in European models, though, which have been rather inconsistent lately, and the midday American model lost some demand compared to its earlier run.

LNG volumes also ramped back up, moving above 4.0 Bcf/d on Monday, while dry gas production continued to hover around 85 Bcf/d, about 9 Bcf/d off November 2019 highs.

Bespoke pointed out that a large rally also was observed in European natural gas prices, “possibly signifying a healthier market over there in the not-too-distant future, meaning that LNG volumes should pick up here in the U.S. as we move into late summer and the start of the autumn season.”

Eyes On Storage

With nearly three months still to go in the traditional injection season, the market has dissected each government storage inventory report with amplified scrutiny. U.S. stocks are unseasonably high at 3,241 Bcf, which is far above both year-ago and five-year average levels, according to the Energy Information Administration.

However, intense heat over much of the Lower 48 in July has significantly lowered the risk of containment this fall, with each of the last five injections coming in well under 100 Bcf. Whether the above-normal temperatures continue through the rest of August remains unclear, with any significant shift to the cooler side portending a return of triple-digit builds before winter begins.

BofA Global Research analysts are optimistic. In a note to clients on Monday, the team of analysts, led by Peter Helles, said that U.S. natural gas is at a turning point. They expect injections to slow in the coming months, barring a “very mild” rest of the summer and therefore don’t expect to see much further downside to front month prices from here.

“We expect end-of-October inventories at 3.92 Tcf, significantly below the record of 4.05 Tcf set in 2016. Thus, we now think the risk of Nymex natural gas prices falling below $1 before October is very small at this point. Industrial demand is recovering sequentially and LNG demand will ramp up starting September and rise strongly into the winter as Europe and Asia free up storage capacity.”

Genscape Inc. said that U.S. LNG feed gas demand from interstate pipelines increased 740 MMcf/d day/day on Saturday, marking a significant uptick in demand as a result of decreased cargo cancellations. Leading the way, feed gas deliveries to Cheniere facilities increased by nearly 580 MMcf/d, representing 78% of the increase in demand.

“Most notably, deliveries to Sabine Pass liquefaction facilities from Creole Trail Pipeline surged by 0.31 Bcf/d,” said Genscape analyst Preston Fussee-Durham. Volumes were primarily sourced from increased receipts from the intrastate Louisiana Energy Access Pipeline, which began full operations Saturday, he said. For Monday’s gas day, feed gas demand from interstate pipelines stood at 3.85 Bcf/d, 0.68 Bcf/d more than July’s average of 3.17 Bcf/d. 

Regardless of the details, Monday’s move caught the market off guard. Bespoke said it would  be natural to assume a move like this is probably overdone, “but is it?” The firm said the market would begin pricing out some demand at these levels compared to when gas was sub-$1.90, but if production cannot make more gains, and LNG does come back, “it is not as easy to argue that these prices are too high.

“These are still historically low prices, even if they feel otherwise, since we have gotten used to the sub-$2.00 price environment,” Bespoke said. “We would not be shocked to at least retest the $2.00 level, but recommend caution if trading the front of the curve here.”

Looking ahead to the price trajectory for next year, EBW Analytics Group said the 2021 calendar year strip was bid up aggressively several times last week, helping to push the near-month contracts higher on several occasions during the course of the week. January 2021 ultimately gained 2.5 cents, while the July contract rose an even steeper 6.5 cents. The December 2022 contract added 6.6 cents.

“These gains reflect recognition that with production likely to remain weak and demand likely to rebound strongly, the 2021 strip may be underpriced,” said EBW. “Over the next week or two, this belief, coupled with expectations that air conditioning demand will rebound in mid-August, could push near-month prices higher. Later in the month, however, declining demand could create renewed downward pressure.”

Permian Back Above Zero

Spot gas prices across the country roared back Monday as cheap prices incentivized power burns despite widespread heat.

After heat indexes soared well into the triple digits last week, temperatures in the coming days are forecast to stall in the 70s and 80s in the central United States, Midwest and Ohio Valley, according to NatGasWeather. Weather systems on tap for this week should lessen the need for high air-conditioning use, while Tropical Storm Isais was on track to make landfall as a hurricane along the coasts of northeastern South Carolina and southern North Carolina.

The National Hurricane Center said the center of the storm is expected to then move inland over eastern North Carolina late Monday, and move along the coast of the mid-Atlantic states Tuesday and into the northeastern United States Tuesday night.

Elsewhere, regionally strong demand was expected in the western and southern United States as strong upper high pressure keeps daytime temperatures in the 90s to 100s, according to NatGasWeather. National demand is projected to increase this weekend into the following week as high pressure regains territory over the central and northern part of the country, though the firm pointed out that this is where the American models have lagged in the amount of projected heat.

Weather aside, Permian Basin pricing, which fell back into negative territory on Friday, lunged higher Monday as production appears to have fallen over the weekend. Genscape reported that Alpine High and deliveries from interstates to Gulf Coast Express (GCX) have both decreased since Friday.

“It’s worth noting that beginning of the month volumes can be more susceptible to revisions, but both of these sets of volumes have shown past correlation with Waha price movements,” Genscape analyst Joseph Bernardi said.

Alpine High production visible on interstates averaged 238 MMcf/d during July, but fell to less than half that amount, at 109 MMcf/d, in the early cycles for Monday’s gas day, according to the analyst. Interstate deliveries to GCX also dropped to less than half their July average, with the decline in those volumes starting on Friday and continuing through the weekend.

However, there are downside risks ahead for Permian pricing.

Several pig runs on El Paso Natural Gas (EPNG) planned for this week and for later this month are expected to disrupt westward flow out of the Permian and could help to drag down Waha basis. These were added to EPNG’s maintenance schedule on Friday and the first of them began Monday, possibly contributing to Friday’s price plunge, according to Bernardi.

With flows at the “L2000” meter in West Texas to be cut by about 270 MMcf/d on three separate occasions this month, limitations can help to trigger downward movements in Waha basis, especially if other export disruptions coincide with L2000 maintenance. “For example, a 16-day force majeure at this meter was one contributor to the extreme lows in Waha cash during March-April 2019,” Bernardi said.

For now, Waha next-day gas moved back to a 91.0-cent average after gaining 65.0 cents from Friday. El Paso-Permian averaged well over $1.00.

Spot gas prices across Texas were up by the double-digits, with Houston Ship Channel climbing 16.0 cents to $1.925. Henry Hub was up 17.0 cents to $1.920.

Cash prices in the Southeast were up around 20.0 cents or so, similar to gains seen in Appalachia. In the Northeast, Transco Zone 6 non-NY rose 16.5 cents to $1.650.Smaller increases were seen farther west. Malin was up 9.5 cents to $1.785.