Natural gas futures traded lower on Friday amid concerns about lofty inventory levels and forecasts for cooler weather across much of the Lower 48.

Evening markets

The October Nymex contract settled at $2.269/MMBtu, down 5.4 cents day/day. November fell 5.4 cents to $2.744.

The prompt month is down more than 40 cents from the high reached in late August amid a summer rally. Next day cash prices, meanwhile, remained under pressure, with NGI’s Spot Gas National Avg. down 17.5 cents to $1.685.

Forecast data Friday pointed to comfortable temperatures over most of the central United States and in the East for the second half of September, likely minimizing cooling demand.

“It is a low demand time of year, as we have a few more weeks yet until moving” into the heating degree day season, “so it is tougher for weather to move the demand needle much, barring stronger anomalies,” Bespoke Weather Services said. “This pattern would result in below-normal gas-weighted degree day totals for the nation…Storage, of course, remains at record levels in some regions, so we will need stronger burns and elevated” liquefied natural gas feed gas demand “to alleviate containment risks.”

LNG volumes hovered near 7 Bcf Friday, well above the levels of a week earlier as feed gas flows improved along with recovery from power outages in the wake of Hurricane Laura in late August. Traders, however, are looking to greater economic activity and pre-winter supply needs in Asia and Europe — key export destinations — to sustain U.S. LNG strength, soak up domestic supplies and support futures.

Still, a cloud of uncertainty is hanging over gas export prospects. Asian and European economies are on the mend as governments and businesses adapt to the coronavirus pandemic, though commercial and industrial energy consumption is recovering gradually. The potential for a second wave of the virus in coming months, however, still looms large.

Long-term weather forecasts also show increasing prospects for a frosty winter in parts of northern Asia, which could fuel import needs, but temperatures likely would need to be exceptionally low for lengthy stretches because Asia and Europe are poised to enter winter with above-normal supplies.

Prior to the pandemic, LNG shipments had helped balance the domestic market, but lockdown orders across Europe and Asia drained global demand and boosted stockpiles, curbing the need for imports in the months since virus outbreaks permeated the globe in early 2020.

The latest U.S. Energy Information Administration (EIA) storage data amplified the importance of an LNG revival. EIA on Thursday reported an injection of 70 Bcf into Lower 48 gas stocks for the week ending Sept 4, versus a five-year average of 68 Bcf. The build lifted inventories to 3,525 Bcf, above the year-earlier level of 2,997 Bcf and above the five-year average of 3,116 Bcf. 

“We are 70% of the way through refills, and the market has replaced 88% of the gas that was delivered last winter,” The Schork Report said, indicating inventories are bloated.

In a separate report, EIA forecast that inventories would approach 4.0 Tcf by the end of October, 6% more than the five-year average.

Schork analysts expect U.S. storage will finish the injection season above 4.0 Tcf, which raises concern about “a growing disconnect” between supply and demand. “All good things for bulls eventually come to an end,” they said.

Analysts at Tudor, Pickering, Holt & Co. noted “lingering concern about storage’s ability to absorb surplus gas” and “risk to breaching capacity in the South Central and Midwest regions.”

Cash Prices

Spot gas prices moved lower across much of the country Friday.

Maxar’s Weather Desk said the week-ahead forecast was undergoing “cooler changes across the eastern half of the United States, with the largest changes focused in the Midcontinent,” potentially resulting in below-average temperatures overall.

While summer heat continued in California and the Southwest, wildfires raging across large areas of the West Coast on Friday showed “no signs of slowing,” Maxar noted, and “wildfire smoke could remain a limiting factor for temperatures.”

El Paso Permian dropped 15.5 cents day/day to an average of $1.370, while Chicago Citygate declined 12.5 cents to $1.790 and Dominion Energy Cove Point fell 49.5 cents to $1.400.

Elsewhere, Algonquin Citygate lost 85.0 cents to $1.405 and Columbia Gas shed 50.5 cents to $1.225.

In California, SoCal Citygate declined 38.5 cents to $1.855.

The wildfire smoke that was blanketing skies out West, however, is limiting solar generation and could result in notable near-term increases in natural gas demand to offset the alternative power resource. The California Independent System Operator said solar generation in recent days was off about one-third from normal summer levels.

Looking ahead, AccuWeather Inc. said Tropical Storm Paulette may become a hurricane in the next few days as it approaches Bermuda. The forecaster also is tracking several more potential storm systems in the Gulf of Mexico. Already this season, 17 storms have formed across the Atlantic, the fastest pace on record, according to the National Hurricane Center.