The market is perilously oversupplied, but recent stats suggest disaster is less likely.
- Gas inventories are still on a path to test storage limits in October, November
- The gas market needs to tighten up by about 2 Bcf/d (more demand and/or less supply) to keep within storage capacity
- Recent stats may show a tightening in the gas market, even after taking out the effect of weather
- Prices in the last week may have responded to not just hot weather forecasts, but a shift in supply-demand fundamentals.
Natural gas in storage is almost to record levels for early July. If the current trajectory continues, there may be too much excess gas for storage caverns to hold.
The chart above shows this year’s inventories (dark blue), last year’s (light blue), the average (dashed line), and the five-year range. Starting with last week’s reading of 3,133 Bcf, the 2019 build rate would take inventories above the “market” capacity of about 4,100 Bcf – something that is not possible and would result in severe price weakness.
However, the five-year trajectory would keep inventories just below capacity. What would have to happen to reduce the growth rate?
The chart below shows three scenarios. The orange line is the 2019 build-rate case, while the blue line shows storage levels if the five-year average rate holds. The red line demonstrates that a 2 Bcf/d gain in demand (or loss of supply) compared to the 2019 trend would set this market on a course to barely stay within storage limits.
The good news: Two recent stats from the EIA show we might already be seeing that 2 Bcf/d of net demand.
The chart below shows the temperature-adjusted inventory builds announced by the EIA. Until recently, the weekly readings have been very similar to those in 2019. However, the last two weeks’ have shown a tightening by about 2 Bcf/d. Because this chart compares injections to temperature, the -2 Bcf/d is after the effects of hot weather.
In our view, the rally in short-term natural gas prices were, in part, with trading analysts’ conclusion that this market’s supply-demand balance is improving. These last two gas-storage injections may be showing the we’re no longer facing a catastrophe scenario for the October and November contracts.
Still, AEGIS recommends adding swaps for the remaining summer months if a client still needs to hedge. Use recent price strength to your advantage. Keep safe, and play for 2021, when prices could get much better.
