The market squeeze is going from bad to worse for natural gas bears, presumably bad enough for some to yell out to be rescued.
Gas futures from July 2021 through February 2022 on the New York Mercantile Exchange’s Henry Hub are averaging above the acclaimed $3 per mmBtu, or per million metric British thermal units, the first time since this year’s winter season bid goodbye via the February deep-freeze.
Wednesday’s trading saw a fitting send-off for the May contract as the front month, since it settled up just over 5 cents at $2.925 per mmBtu.
Henry Hub’s new front-month, June, might have the chance to test the $3 mark itself by today as the US Energy Information Administration issues its weekly update natural gas storage at 10:30 AM ET (14:30 GMT).
A consensus of estimates from industry analysts tracked by Investing.com shows the EIA is likely to report an addition of 11 bcf, or billion cubic feet, to storage for the week ended Apr. 23.
That would be way lower than the 38-bcf build from the previous week. It also compares with the 66 bcf injection into storage during the same week a year ago and the five-year (2016-2020) average build of 67 bcf.
Gas Injections Shrinking Each Week
But even an 11-bcf build forecast for last week might be too much, considering what the EIA had been reporting of late.
Case in point: For the week ended Apr. 16, the forecast build was 49 bcf, but the EIA reported 38 bcf.
For the Apr. 9 week, the estimated build was 67 bcf but the number that came in was 61 bcf; and in the preceding week, the targeted injection was 21 bcf versus a final number of 20 bcf.
Since mid-March, chilly winds have been the staple in the US Northeast to Midwest regions, defying initial forecasts for bland spring weather.
The result has been smaller-than-expected gas injections into storage over the past three weeks as utilities’ burn rates for heat and power generation versus production continually exceeded forecasts.
There were 88 HDDs, or heating degree days, last week compared with a 30-year average of 66 HDDs for the period, according to data provider Refinitiv.
HDDs, used to estimate demand to heat homes and businesses, measure the number of degrees a day's average temperature is below 65 degrees Fahrenheit (18 degrees Celsius).
Colder-Than-Expected Gusts, Weak Gas Output Underpin Rally
Gelber & Associates, a Houston-based gas markets consultancy, said in a note to its clients Wednesday that strong gusts of colder-than-normal temperatures increased weather-driven demand and put a lid on storage injection for last week.
“Upcoming injections will be hefty in comparison to this latest one,” Gelber said, adding that volumes will “however, be below the 5-year average and last year’s injection.”
The current gas price rally is also being supported by falling production of the fuel. According to Refinitiv data again, gas production in the Lower 48 US states averaged 90.5 bcf, or billion cubic feet, per day last week, below the 91.5 bcfd noted during the week to Apr. 16.
So back to gas bears: How bad is their pain now?
It depends, of course, at what level they began shorting gas.
Henry Hub’s May contract fell to as low as $2.49 on Apr. 5 when the weather briefly turned warmer, triggering a 5% collapse on the market. Supposing a bear locked in at just above that level—say $2.50—that would be a 20% spike.
More Pain For Gas Bears?
Technical charts of natural gas, meanwhile, suggest more upside in the near term.
Investing.com’s Daily Technical Outlook rates Henry Hub’s June contract a “Strong Buy,” forecasting a three-tier resistance, first at $2.952, then $2.978 and later at $3.020.
As I wrote this, June gas was trading at $2.942. Unless it loses its momentum, the market is on track for a third straight week of gains and a 13% gain for this month—its biggest win since October’s 33%.
For the current week, naturalgasintel.com said it expected a “tame” overall picture for gas demand with intermittent volatility.
Though weather is typically not a major price driver this time of year, temperature fluctuations expected in the coming days may be sparking a bit of volatility in the futures market. The weather is, however, “getting more interesting in a rather subtle way” as forecasting models show cooling degree days running above normal, the industry portal said, citing data from Bespoke Weather Services.
Bespoke added:
“The continuation of the current regime beyond the next couple of weeks would shift weather over to the bullish side of the ledger.”
LNG ‘Firing On All Cylinders’
And according to naturalgasintel.com, export demand for LNG, or liquefied natural gas, was also firing on all cylinders.
LNG feed gas volumes continued to fluctuate on Thursday, but held near 11.5 bcf for the third straight day, it said.
EBW Analytics pointed out that with late-season cold and continued strong Asian demand, European natural gas storage inventories have averaged a startling 6.1 bcf/d tighter than the five-year average since the beginning of the year.
“A very tight European supply/demand balance bolsters the injection-season outlook for US LNG,” EBW said. “With LNG feed gas demand averaging above 11.5 bcf/d month-to-date, analysts may revise LNG feed gas expectations higher, providing more incentive for natural gas to move higher this summer.”
Disclaimer: Barani Krishnan 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. He does not hold a position in the commodities and securities he writes about.