Natural gas posts weekly loss despite Friday rally
The July Henry Hub contract expired this week, making August the new prompt month. The August contract fell 19c this week to $3.75/MMbtu, despite climbing 20c on Friday. The Winter ‘25/’26 seasonal strip fell 9c to $4.64/MMbtu, but prices gained further out in the curve. Summer ’26 posted a 6c gain to finish the week at $4.16/MMbtu, while Winter ‘26/’27 also gained 6c to settle at $4.65/MMbtu.
Prices rose last week in advance of a heat wave which impacted much of the Midwest and Northeast this week, but Lower-48 average temperatures have already begun easing relative to what was seen this week. Most of the week saw forecast models lose cooling demand, but this trend reversed on Friday as the Euro Ensemble model posted the largest 24-hour CDD gain of the summer so far, according to Commodity Weather Group. This end-of-week shift is likely what propelled near-term gas prices higher. The South Central region specifically is forecasted to see extremely elevated temperatures, especially for the week starting July 6.
The EIA reported a larger than expected storage build, which further expanded the surplus to the five-year average. On Thursday, the EIA’s gas inventory report showed an increase of +96 Bcf, compared to the Bloomberg survey which showed analysts expected a +86 Bcf build. This puts the current storage surplus at +179 Bcf. Since April, nearly all storage builds have been larger than the five-year average injection, and most were the largest seen over the past five-years. Next week’s report, which will cover this current week, should be one of the first in to be smaller than average this summer.
AEGIS recommends utilizing costless collars, especially in the winter months. We remain bullish this coming winter through 2027.
Natural Gas Factors
Price Trend. (Bearish, Priced In) While gas prices have rebounded over the last two weeks, prices remain well off the highs seen in March.
S&D Balance. (Mostly Bullish, Priced In)
Storage Level. (Mostly Bearish, Priced In) The storage level is a bearish priced-in factor due to the high levels of gas in inventories relative to the five-year average. According to the latest EIA weekly natural gas inventory report, the surplus to the five-year average stands at 21 Bcf above the five-year average and 20 Bcf above last year.
Dry Gas Production. (Bearish, Surprise) These are the most critical drivers of gas prices outside of weather. A material increase in either would pressure prices lower and loosen the supply-demand balance. These are also longer-lasting factors that can weigh on prices for years. Since the start of 2024, gas production has fallen sharply, driven by substantial curtailments and seasonal declines in Appalachia. Given low gas prices, producers may continue to curtail gas production until economics improve. A material drop in production could improve storage balances, but if prices begin to improve, there is a large amount of supply that can be brought back to market, which would be a bearish risk. With some evidence that production is now returning to the market, the dry gas curtailment bubble has been shifted to the bearish quadrant. A large amount of production was likely taken offline this year, which is now waiting to come back. Some operators may also have been drilling and completing wells during this time, which are ready to flow gas if economics have improved enough.
Associated Gas Production.(Bearish, Priced In) With oil prices remaining high and additional egress capacity coming to the Permian in the form of the Matterhorn pipeline, associated gas production may continue to grow in 2024. The Matterhorn pipe will send an additional 2.5 Bcf/d to the Gulf Coast, posing a bearish risk to Henry Hub and regional basis prices such as Houston Ship Channel.
Renewables. (Mostly Bearish, Partly Priced In) Renewables remain a perennial threat to gas prices and gas's share of the power stack. Renewable capacity additions in 2023 are expected to set a new record and are now the second-most prevalent source of electricity generation. Still, renewables have proven unreliable at times, which has exacerbated the global energy squeeze as gas usually serves as a flex-fuel when other sources underperform. We think this is priced in, but the effect at the summer peaks on gas generation has some bearish potential.
LNG Outages. (Bearish, Surprise) Feed-gas levels are at their near max capacity, and if there's any unplanned maintenance event or an outage, it might act as a surprise bearish factor for natural gas prices.
Slow Supply Response. (Bullish, Surprise) If production remains near where it is currently and does not grow into winter, this would be a bullish factor for gas prices. Typically, the Northeast region sees higher production receipts in the higher-demand months of the year. Still, due to lower activity levels over the past year, production growth may be more muted.
LNG Schedule. (Bullish, Surprise) With a significant amount of new LNG feedgas demand coming this year and the next few years, if these facilities startup sooner than anticipated it should be a bullish factor for gas prices. One example of this occuring is the recent startup of Plaquemines LNG, which saw feedgas levels reach more than 1 Bcf/d much sooner than anticipated.
Production Front-Running. (Bearish, Surprise) If producers begin to ramp up gas production in advance of the new LNG demand, this could lead to a temporary mismatch between supply and demand and weaken gas prices. The other option would involve producers waiting for a price signal from the market before increasing output.
Hedge Activity. (Bullish, Surprise) Following the sharp rally in January, many producers may have taken advantage of the higher prices and layered in more hedge volumes. This could result in less selling pressure down the curve if they are more adequelty hedged now.
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