Natural Gas Above $3 Is No Magic; Storage Has to Melt

Sunil Kumar Dixit, the chief technical strategist at SKCharting.com, said chart-wise, the breakout in Henry Hub appeared to have come from “prolonged momentum accumulation and consolidation.”

He said the momentum was supported by the 5-day EMA, or Exponential Moving Average, dynamically positioned at $2.83 and “remained intact with room for some measured correction towards the breakout zone for a regular retest.” For an idea, he said support could be as low as $2.67 on the 100-day SMA or Simple Moving Average.

Dixit added:

“Above $3.01, the way is open for further gains to the monthly middle Bollinger Band of $3.25, followed by the 200-day SMA of $3.31. Major upside resistance is seen at the 50-week EMA of $3.58.”

Those watching fundamentals say that if gas is to avoid revisiting $2 lows — and this year’s sub-$3 streak is the already fourth longest of its kind since 2008 — then Rule 101 in natural gas would apply. And that is: of the fuel cannot permanently stay 20% over year-ago levels, at least for the optics of a bull market. 

Before last week’s reading on gas storage that will be made available later today, the Energy Information Administration, or EIA, reported an inventory level of 3.001 trillion cubic feet, or tcf, in underground caverns across the United States. That was 22.4% above the year-ago storage level of 2.451 tcf and 12% higher than the five-year stockpile of 2.679 tcf.

While the current storage level may seem excessive at a glance, the truth is it has come off the highs of recent months. In mid-May, for instance, storage was 30% higher than year-ago levels and 18% above the five-year average.

Yet, analysts at EBW Analytics note that natural gas marketers “appear eager to sell off excess storage inventories into the scorching Texas heat wave, in the process clearing space to maximize attractive contango opportunities across the NYMEX curve during the autumn and into the winter.”  

John Sodergreen, the author of the weekly trade journal on natural gas called “The Desk,” added to storage expectations by saying in his latest Wednesday edition:

“With  overbearing heat continuing for the week ending Aug. 1 and continuing throughout the first half of August, it would not  be surprising to see the regional storage surplus pared an incremental 30-40 bcf  over the next trio of EIA reports into mid month.” 

But he also concluded that line by saying, “Here’s hoping” — a nod to the fact that there’s little any individual could do to alter the market’s supply dynamics. If the gas in storage is to melt, it has to be from power burns and LNG shipments that must consistently beat production gains. It’s simple logic — no magic.

Said Sodergreen:

“Add to  the mix that European stocks are high, prices across the pond are  low and both European and Asian buyers are now trying to make  sense out of a warm fall outlook.”

According to industry analysts tracked by Investng.com, storage rising by 30  bcf would bring gas stockpiles across the Lower 48 US states to 3.031 tcf, placing this year’s inventories 306 bcf above the five-year average and 536 bcf above year-ago levels for the comparable week. 

Ryan Parsons of Gelber & Associates says that given the price action that’s forced market entities to reposition rapidly to $3 levels, storage has the potential to add to the market’s already notable volatility. 

“While the supply-demand balance would otherwise be quite similar to last year, the heat-related demand for this storage week has pushed  our estimate much lower than this time in 2022,” said Parsons.

Rhett Milne of natgasWeather.com tells us that the next two EIA storage reports are expected to print builds slightly smaller than five-year averages to further decrease surpluses to near 300 bcf. Adds Milne:

“If widespread heat can hold over much of the US  for mid-to-late August, surpluses could be reduced toward 250  bcf, although the theme has been cooler trends show up in time,  and that’s again the risk. It would also be helpful if the supply demand balance were to tighten, which could be accomplished  through lighter production or stronger exports.” 

Eli Rubin, an analyst at EBW Analytics, agrees with the outlook:

“We continue to anticipate production growth likely ebbing in early autumn due to 1. a lagged  upstream response from the collapse in natural gas pricing earlier this year, 2. steep contango  in the NYMEX forward curve incentivizing producers to shape their production profile in favor of delaying supply into early winter, and 3. pipeline maintenance often planned for late summer and early fall shoulder season ahead of the higher-demand Winter season.” 

At a high level, Rubin says, producer earnings calls appear to reinforce his basic outlook, “although growing upstream production efficiencies are positioning producers to expand production again into calendar 2024 should higher pricing materialize.” 

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Disclaimer: The aim of this article is purely to inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.