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James Hyerczyk
Natural Gas

Natural gas futures are under pressure on Tuesday as traders react to an expected increase in production and short-term lower demand. Production is expected to rise because platforms that had been shutdown ahead of Hurricane Barry are being brought on line. Cooler temperatures and lower usage associated with the hurricane are also weighing on demand.

At 09:24 GMT, September natural gas is trading $2.361, down $0.025 or -1.05%.

Short-Term Weather Outlook

According to NatGasWeather for July 16-July 22, “(Hurricane) Barry will bring rain & cooling across the Ohio Valley the next few days with highs of 80s. It will remain hot to either side of the storm with highs of 90s The Southwest will be very hot with highs of 100-110s, although comfortable across the northern US, especially the NW with highs of upper 70s & 80s. Hot high pressure will strengthen over Midwest to Northeast Wednesday to Friday with highs of mid-90s from Chicago to New York City, while also hot across the southern & central US to drive very strong national demand. Overall, national demand will be high increasing to very high.

NatGasWeather also said on Monday, “The new trading week will be weighing a plethora of important factors that could impact prices, highlighted by tropical system Barry that’s resulted in decreased production over the Gulf of Mexico and inland but with losses in demand through cooler conditions and LNG exports. But are the impacts and duration of impacts what the nat gas markets were expecting?

Also of consideration, weather trends were hotter for the middle of this week through early next week as the strongest heat so far this year arrives. Although this will be countered by the weather data still favoring cooling across the Great Lakes and East July 24-28th and where the data is likely to be viewed as not quite hot enough. Plenty of things that could impact early week trade.”


Production Likely to Increase

The Bureau of Safety and Environmental Enforcement (BSEE) said, based on data from offshore operator reports, about 60%, or 1.68 Bcf/d, or Gulf of Mexico natural gas production remained shut in as of midday Monday. About 69%, or 1.3 million b/d of oil production also was shut in.

As of Monday, personnel had been evacuated from a total of 267 production platforms, roughly 40% of the 669 manned platforms in the Gulf of Mexico. Staff had also been evacuated from 10 non-dynamically positioned (DP) rigs, which is equal to about 48% of the 21 rigs in operation. All 20 of the DP rigs operating in the Gulf had returned to pre-storm positioning, the BSEE said.

Daily Forecast

The forecasts aren’t clear about the return of heat. Where it will hit and how long it will last. Uncertainty means selling.

EBW Analytics Group called the market’s concern about Barry’s demand destruction “overblown.”

Analysts with Drillinginfo took a less bullish view on Barry’s cumulative impact, noting that “while the initial response was a reduction in production from the Gulf operators evacuating rigs, the longer-term impact will be on the reduced temperatures associated with the storm’s rains. The market will start to get insight as to the effect on power demand early this week as the flow data becomes transparent.”

My charts see $2.296 to $2.253 as a value area. I think sellers are eyeing this region as a downside target, and aggressive counter-trend buyers see it as opportunity.

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