With supply challenges enduring and cooling demand mounting, traders initially shrugged off a modestly bearish government inventory report and drove up natural gas futures much of Thursday.

At A Glance:

  • EIA posts 103 Bcf injection
  • Build marks biggest of 2022
  • Production proves strong

The August Nymex gas futures contract ultimately fizzled in afternoon trading, though, dipping 8.9 cents day/day to settle at $6.600/MMBtu. September fell 7.8 cents to $6.511.

NGI’s Spot Gas National Avg. gained 19.0 cents to $6.820.

Thursday’s see-saw natural gas futures trade followed a 52.6-cent prompt month surge a day earlier. Analysts attributed that rally – and early momentum Thursday – to production estimates holding close to 95 Bcf this week and forecasts for scalding heat in the back half of July. 

The inventory report that showed continued increases in storage for the winter ahead, however, eased upward pressure on prices after traders digested the data.

Looking ahead, though, much depends on the intensity of weather-driven demand and producers’ ability to meet it.

AccuWeather said aside from short-lived reprieves, the oppressive heat that has dogged Texas and most of the South this summer will persist through late July and into August.

In Texas, for example, the firm noted that Austin and San Antonio are enduring their hottest summers on record – at least so far.

A “dome of high pressure that has been a mostly permanent fixture across the South Central states” is trapping in hot air and bolstering temperatures into the triple-digits, AccuWeather meteorologist David Houk said. 

The Southwest deserts will also continue to see lofty highs above 110, while the Southeast wades through widespread highs in the 90s that are amplified by heavy humidity, driving cooling demand.

“To add insult to injury, the summer months have barely just started and higher temperatures are all but certain in late July and early August,” Rystad Energy analyst Ryan Kronk said.

He, too, said Texas is likely to remain Ground Zero in the Lower 48. Given its massive population, demand in the Lone Star State could force utilities to eat into storage supplies to meet demand, leaving less to draw upon in the winter ahead. This adds to the lackluster production levels that have hovered about 2 Bcf below the 97 Bcf that analysts and government forecasters had expected by July.

“Texas is grappling with another heatwave, with highs reaching 114 degrees, placing extreme pressure on a power grid that has come under scrutiny in recent years for its ability to handle increased demand,” Kronk said.

At the same time, extreme heat is now gripping stretches of Europe, where supplies are precarious. Countries across the continent had little in storage following a frigid winter, and they are now increasingly dependent on LNG – notably including from the United States – to refill inventories before the next heating season. This is in large part because of Russia’s war in Ukraine. Europe is breaking ties with Kremlin-backed energy to protest the conflict.

Meanwhile, Kronk said, the “widespread heatwave and drought are boosting electricity demand for cooling and curbing supply from hydro and nuclear” in Europe.

All of this is keeping U.S. liquefied natural gas export facilities operating near capacity. LNG feed gas volumes in July have held consistently above 11 Bcf/d. At the level, LNG plants are essentially maxed out, excluding the sidelined Freeport facility in Texas. Freeport was forced offline through the summer following a June fire.

On Par Storage Print

All of which explains why markets, at first, looked past the U.S. Energy Information Administration’s (EIA) latest storage report on Thursday. EIA printed an injection of 58 Bcf into natural gas storage for the week ended July 8. 

Prior to the EIA report, median estimates of major surveys hung in the high-50s Bcf. The actual result compared bearishly to a 49 Bcf build during the comparable week last year and a five-year average injection of 55 Bcf.

The latest build lifted working gas in storage to 2,369 Bcf.

Still, stocks were 319 Bcf below the five-year average heading into the peak of summer demand season.

Analysts on The Desk’s online energy platform Enelyst noted the ongoing Freeport LNG export outage as a key bearish price factor. This mishap has freed up more gas for domestic storage, offsetting in recent weeks the robust summer demand and production challenges.

Still, many of the analysts were also dubious about how long the Freeport benefit to supplies could offset the bullish supply/demand fundamentals. Some of them predicted an injection in the 30s Bcf with the next EIA report, covering the week ending July 15.

That would compare with an injection of 50 Bcf during the comparable week last year and a five-year average injection of 41 Bcf.

The “impressively hot” temperatures in the outlook for the back half of July and week/week production weakness support a bullish case, NatGasWeather said. The firm said forecasts point to “widespread heat” and “strong to very strong” demand for natural gas nationally from this weekend through July 27.

Broken down by region, Thursday’s print showed that the Midwest and East regions led with injections of 24 Bcf and 19 Bcf, respectively, according to EIA.  Pacific inventories rose by 9 Bcf, while Mountain region stocks increased by 5 Bcf.

Amid the heat in Texas and neighboring states, however, South Central region stocks were flat.

Over the remainder of summer, “any reported build of less than 40 Bcf could be viewed bullishly,” Mobius Risk Group analysts said, while builds approaching 60 Bcf “are almost guaranteed to favor bears.” 

Spot Prices Sail

Physical natural gas prices forged ahead Thursday, with strong gains across the South propelled by cooling demand.

In Texas, Houston Ship Channel climbed 28.0 cents day/day to average $6.575 and Transwestern gained 19.0 cents to $6.350.

KRGT Del Pool in the Southwest popped 57.5 cents to $7.885.

National Weather Service data showed that with the exception of the Northwest and Northeast corners of the Lower 48, most of the country will bake under lofty temperatures through the weekend, with highs ranging from the upper 80s to above 110 degrees.

Bolstered by hot high pressure, such conditions are expected to persist next week, driving strong demand for natural gas.

Unplanned maintenance work, meanwhile, continues to hamper the supply side.

Tennessee Gas pipeline (TGP) announced two force majeures (FM) beginning Thursday (July 14), cutting flows by about 179 MMcf/d in Pennsylvania and 266 MMcf/d in Alabama.

Wood Mackenzie analyst Young Liu noted that the reduction in Alabama could prove particularly problematic given already limited supplies in the Southeast – after previous maintenance projects and soaring cooling demand in the region.

The Alabama FM “would further exacerbate the current situation as it restricts gas moving south from TGP — and further support the premium demanded by Transco Zone 4” in the Southeast, Liu said.

Transco Zone 4 on Thursday gained 38.0 cents to $10.250 and Florida Gas Zone 3 rose 22.5 cents to $10.630.