Natural Gas Price Fundamental Weekly Forecast – Tight Balances Supportive; Needs Lingering Heat to Fuel Rally

Natural gas futures settled lower last week despite a rise in weekly cash prices and a test of a multi-month high on July 6. Traders said the volatile trade throughout the week was tied to the passing of Tropical Storm Elsa that brought cooling winds and rains to the East Coast, while dampening cooling demand in parts of Texas.

Even the U.S. Energy Information Administration’s (EIA) weekly report that showed a surprisingly light storage injection that pointed to tight supply/demand balances, failed to generate enough buying for a sustainable rally.

Last week, September natural gas futures settled at $3.657, down $0.010 or -0.27%. This is down from a high of $3.789.

Energy Information Administration Weekly Storage Report

Working gas in storage was 2,574 Bcf as of Friday, July 2, 2021, according to EIA estimates. This represents a net increase of 16 Bcf from the previous week. A year earlier, the EIA recorded a 57 Bcf injection and the five-year average is 63 Bcf.

Stocks were 551 Bcf less than last year at this time and 190 Bcf below the five-year average of 2,764 Bcf, total working gas is within the five-year historical range.

The report came in below the lowest estimates found by major polls from The Wall Street Journal, Bloomberg and Reuters. The government number also fell well below median projections. NGI’s model predicted a 28 Bcf build for the report.

The EIA print reflected “the tightest supply/demand balances we have seen yet this warm season,” Bespoke Weather Services said. “…We need more material gains in production in order to get back on a trajectory that promotes sufficient storage levels as we head toward and then into the upcoming winter season.”

Traders Already Looking Toward Tight Fall/Winter Supplies

NGI reported that Wood Mackenzie analyst Eric Fell said, compared to degree days and normal seasonality, the latest injection was tight by approximately 4 Bcf/d versus the five-year average. The build “was a whopping 60 Bcf lower than the previous week, driven by 18 additional degree days,” along with a 1 Bcf/d decline in production.

The modest injection raised concerns that, with production tepid and summer demand strong, supplies could prove light ahead of winter.

The supply/demand balance “could become even tighter this fall and dangerously tight next winter,” EBW Analytics Group said Friday.

Weekly Forecast

Although the price action was choppy last week and buyers refused to chase the market higher, I think we’re still in a weather market, but with bullish traders preferring to buy dips rather than strength. Ok, with that type of price action, I’ll concede we’re only in a mild weather market. But there is time for the market to heat up.

Hot upper high pressure will “push national demand back to strong levels, aided by persistent heat over the West,” NatGasWeather said. “There will again be warm and showery conditions over Texas and the central U.S. as a weather system stalls, but demand will still be decent due to high humidity.”

The forecaster said widespread heat is expected to persist through the end of July and into August, keeping air conditioners cranking and likely applying upward pressure on cash prices deep into the summer.