Storage Deficit Worries Driving NatGas Momentum

Natural gas futures are posting another spike to the upside on Wednesday on news of a drop in U.S. output, cooler forecasts and the possibility that additional sanctions on Russian gas supplies will keep U.S. liquefied natural gas (LNG) exports near record highs for months to come.

Typically, U.S. gas prices edge lower during early spring or the start of the so-called “shoulder season”. Sometimes there is some buying tied to lingering winter cold and speculative buying in anticipation of a hot summer, but the price action we have been witnessing the past two weeks is really surprisingly strong.

At 12:13 GMT, May natural gas futures are trading $6.302, up $0.270 or +4.48%. On Tuesday, the United States Natural Gas Fund ETF (UNG) settled at $21.05, up $1.00 or +4.99%.

Strong Liquefied Natural Gas Demand

The strength in the U.S. natural gas market is being fueled by rising global gas prices as several countries seek to wean themselves off Russian gas after Moscow invaded Ukraine on February 24. The threat of new sanctions perhaps later today could be the catalyst that drives prices even further higher.

As Europe tries to refill natural gas storage bins, demand for U.S. LNG remains robust. Record U.S. LNG demand has kept the front-month in technically overbought territory with a relative strength index (RSI) over 70 for a fifth day in a row for the first time since September 2021. Additionally, this has caused the 12-month futures strip to rise to its highest level since February 201 for a third day in a row.

Unsteady Production Triggering Bullish Response

Data provider Refinitiv said average gas output in the U.S. Lower 48 states has risen to 94.6 billion cubic feet per day (bcfd) so far in April, from 93.7 bcfd in March. That compares with a monthly record of 96.3 bcfd in December.

On a daily basis, however, output was on track to drop about 1.4 bcfd to 93.5 bcfd on Tuesday due mostly to declines in Texas, according to preliminary Refinitiv data.

If that drop is correct – preliminary data is often revised – it would be the biggest one-day decline since extreme cold in early February froze wells, according to Refinitiv’s assessment.

NatGasWeather See Bullish Trend Developing

Natural Gas Intelligence (NGI) reported bullish sentiment Tuesday derived from “the same general narrative of the past several weeks,” according to NatGasWeather.

An enduring storage deficit versus the five-year average, one that is likely to persist “into the foreseeable future,” contributes to a “relatively bullish background state,” the firm said.

Traders Tuesday also appeared to be factoring in expectations for a hotter-than-normal summer, as well as high inflation and continued geopolitical tensions from the war in Ukraine, NatGasWeather added.

“It’s difficult to know how high natural gas prices go or if sellers will step in soon, but we continue to caution natural gas prices tend to extend higher than many expect, suggesting there could still be room to run,” NatGasWeather said. “To our view, production would need to increase by at least 2-3 Bcf/d to give bears fodder to counter relatively tight U.S. supplies.”

Daily Forecast

The strong upside momentum early in the session has put the May natural gas futures contract in a position to hit the October 8, 2021 main top at $6.457.

Sellers could come in on the first test of this level, but overcoming it with conviction will quickly put $7.000 on the radar.