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James Hyerczyk
Natural Gas

Natural gas futures closed sharply lower last week. Losses could have been worse if not for a short-covering rally on Friday. The catalysts behind the selling pressure are rising U.S. storage inventories and U.S. export concerns. Both are the result of a plunge in demand due to the COVID-19 pandemic.

A steep drop in the number of operating natural gas and crude oil rigs seems to have had little impact on supply. Additionally, those waiting for the hot weather to return have been mostly disappointed.

Last week, July natural gas settled at $1.849, down $0.032 or -1.70%.

US Energy Information Administration Weekly Storage Report

The EIA said working gas in storage rose by a net 109 billion cubic feet (Bcf) in the week-ended May 22. Traders had forecast a build of 113 Bcf.

The 109 Bcf injection “does confirm balance tightening, but not enough to suggest that we are significantly lowering the risk of completely filling storage this fall,” Bespoke Weather Services said.

NatGasWeather analyst Andrea Paltrinieri characterized the EIA figure as “a no good number.” Participating on The Desk’s online energy chat platform Enelyst, Paltrinieri said he would have preferred to see an injection in the high 90s Bcf range in order to confirm better tightening of the supply/demand balance.

“I was at 110 Bcf, not so good to avoid 4 Tcf right now in my model,” the analyst said.

Total working gas in storage as of May 22 stood at 2,612 Bcf, 778 Bcf higher than last year and 423 Bcf above the five-year average, EIA said.

Broken down by region, the East injected 35 Bcf into storage, and the Midwest added 30 Bcf, according to EIA. South Central inventories rose by 24 Bcf, including a 20 Bcf build in nonsalts facilities and 3 Bcf build in salts. The Pacific added 11 Bcf into stocks, while the Mountain range injected 8 Bcf.

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New Concern:  Falling Production

Genscape reported that U.S. production declined slightly last week from near two-week highs that on last Tuesday reached 86.6 Bcf/d. Production last Thursday was 85.7 Bcf/d, which is about 6.6 Bcf/d less than last month’s average, according to the firm, and the result of production shut-ins around the country.

“While production has rebounded slightly off of May 20 lows of 84.9 Bcf/d, Wednesday’s and Thursday’s values suggest a slight reversal to the downside,” Genscape analyst Preston Fussee-Durham said.

Short-Term Weather Outlook

Bespoke sees summer weather to become increasingly important as the move to a La Nina base state favors a hot summer, which may add some strength to power burns, Natural Gas Intelligence reported.

At some point in the next two-to-three weeks, the firm expects prices to make another run toward $2.00, but it pointed out that selling pressure could continue in the near-term before getting a push higher.

“This would keep the general prompt-month trading range alive and well,” Bespoke added.

US Crude Oil, Natural Gas Rig Count Slips

Baker Hughes on Friday reported that the number of active U.S. rigs drilling for oil declined by 15 to 222 this week. The oil-rig count has now fallen for 11 weeks in a row, suggesting further declines in domestic crude output. The total active U.S. rig count, meanwhile, also fell by 17 to 301, according to Baker Hughes.

The U.S. natural gas rig count dropped two units to finish at 77 for the week-ending Friday, May 29.

Weekly Forecast

Continuing warming in the latest weather models helped snap the losing streak late in the week, which is what traders will try to build on early this week. In my opinion, weather is going to move to the forefront this week.

Natural Gas Intelligence reported that of early Friday, the weather data had taken “another step in the hotter direction” over the past 24 hours, showing changes in the eastern half of the Lower 48 between days six and 15 of the outlook period, according to Bespoke Weather Services.

“With projected global angular momentum anomalies heading negative over the next two weeks, signifying the atmosphere’s move toward a La Nina base state, confidence is increasing” in overall hotter trends for the summer, Bespoke said. “While not an extreme pattern at the moment, other than in parts of the central U.S. where stronger anomalies are most persistent, there is just a lack of cooling anywhere once beyond the start of next week. This keeps projected demand above even the hotter 10-year normal.”

For a look at all of today’s economic events, check out our economic calendar.

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