Natural Gas News: LNG Demand and Summer Heat Improve Gas Market Outlook

LNG Demand and Summer Heat Keep Gas Bulls in Control

July natural gas futures are trading near $3.26/MMBtu Wednesday morning after bouncing off the $3.00 area. That is a meaningful recovery and the market is not giving it back. The buying picked up when traders started pricing in what the second half of injection season actually looks like with LNG running near record levels and summer heat building across the western United States.

January futures are at $4.435, up from a contract low at $4.311 just two days ago. The winter strip is where the real money is moving and that tells you everything about how this market sees the next five months playing out.

LNG Exports Are Pulling Gas Out of the Country

LNG feedgas deliveries to U.S. export terminals surged more than 13% from the prior week to between 19.3 and 19.6 Bcf/d. That is the highest print in six to seven weeks and the timing matters because seasonal maintenance is wrapping up at several facilities. Plants are coming back online and the volumes are climbing right when the market needs injections to build a cushion before winter.

Every Bcf that goes to an export terminal is a Bcf that does not go into storage. If these facilities keep running near capacity through July and August, the injection numbers are going to disappoint and the market knows it. International demand is adding pressure on top of that. Reduced LNG availability from Qatar and ongoing risks to major shipping routes are making U.S. cargoes more attractive to global buyers. That is not a short-term story. That pull on domestic supply runs through the rest of the year.

Summer Heat Is Not Here Yet and Power Burn Is Already Firm

Forecasters expect above-normal temperatures across the western United States through the end of June. That has not fully hit the demand numbers yet and power burn is already running strong. U.S. electricity output is more than 2% above year-ago levels right now. When the real heat arrives in July and August and air conditioning load picks up across the major population centers, gas consumption from the power sector is going to climb on top of what is already an elevated baseline.

The concern is not whether a hot week lifts the prompt month a few cents. The concern is whether six or eight weeks of sustained heat keeps power burn elevated long enough to cut into storage builds during the most critical stretch of the refill season. July natural gas broke above its 50-day moving average earlier this week and is holding. That breakout happened before the worst of the summer heat has even started.

Production Is Growing but Rigs Are Falling

Lower-48 dry gas production hit approximately 109.7 Bcf/d, up nearly 3% from a year ago. The EIA raised its forecast for next year’s output. On the surface that looks like enough supply to keep storage comfortable. I am not convinced.

Baker Hughes reported active natural gas drilling rigs dropped by three last week to 121, the lowest count in eight months. Production is still climbing on momentum from earlier drilling activity but fewer rigs now means slower growth later. If demand keeps expanding from LNG and power burn and the rig count keeps falling, the supply side of this market gets tighter at exactly the wrong time.

Storage Looks Fine Right Now and That Is the Trap

The last EIA report showed a 108 Bcf injection, bigger than expectations and bigger than the five-year average. Total storage is roughly 6% above the seasonal norm. On paper that is comfortable. The forward curve disagrees.

The winter strip has been steady even while storage sits above average. Traders are not trading where storage is today. They are trading where storage will be at the end of October if LNG stays near 20 Bcf/d and summer heat pushes power burn above normal for two straight months. A surplus that looks healthy in June can vanish fast if injection pace slows through August and September. Low storage entering the heating season leaves the market wide open to price spikes on the first cold shot.

The winter strip is not waiting for confirmation. It is already repricing that risk.

Daily July Natural Gas Futures Technical Analysis

July natural gas futures are edging higher early Wednesday with buyers hoping to build on the breakout of the 50-day moving average that took place earlier in the week. That indicator comes in at $3.117 today as support. Additional strength is coming from crossing to the strong side of a pair of 50% levels at $3.145 and $3.207. Both are also new potential support level.

The market is pretty open to the upside, which bodes well for momentum traders, looking for a big score. The nearest upside target is an intermediate 50% level at $3.387. This is followed by the main swing top at $3.396, which is a potential trigger point for an acceleration into the 200-day moving average at $3.593.

On the downside, the key indicator is the 50-day moving average. If it fails, we could see a retest of $3.017, but the market is well supported by additional main bottoms at $2.978, $2.951 and $2.893.

Daily January Natural Gas Futures Technical Analysis

January Natural Gas futures are up early Wednesday at $4.435, just two days after hitting a contract low at $4.311. Traders betting on hot temperatures and strong LNG demand to deplete storage levels ahead of the winter heating season are showing strong interest in this trading month, which is part of the winter strip.

The main trend is down according to the moving averages and the main swing chart. However, we’re not as worried about the trend at this time as we are about building a support base.

The 50-day moving average at $4.569 and the swing top at $4.599 are our first objectives and potential trigger points for an upside breakout. If the summer heat starts to intensify, you’ll see interest build in this futures contract.

What to Watch

LNG feedgas volumes and weather forecasts are the two numbers driving this market right now. If export facilities keep running near 19 to 20 Bcf/d and the heat forecasts expand beyond the western states into the major demand regions, storage builds are going to slow and the winter strip keeps climbing. The 108 Bcf injection last week gave the bears one comfortable print. They need a string of them to change the story and the demand picture is working against that.

July natural gas broke above the 50-day moving average at $3.117 and is holding above the 50% levels at $3.145 and $3.207. The path is open to $3.387 and the swing top at $3.396. A move through there accelerates into the 200-day at $3.593. January needs to reclaim $4.569 and the swing top at $4.599 to confirm the base is real. The setup favors the bulls as long as LNG demand holds and summer heat cooperates.

More Information in our Economic Calendar.