*Bearish injection together with an unfavorable weather forecast sparked a selloff
The natural gas futures market slumped further following the bigger-than-expected rise showed in the US Energy Department's weekly inventory release. It was the second straight weekly decline of a sizeable proportion. The bearish injection, together with an unfavorable weather forecast, sparked a selloff that left the US benchmark futures with a loss of almost 9.7% for the week following a 12.3% decline in the previous week.
Futures for October delivery also fell after weather updates showed forecasts of a mild winter that would hamper the demand for natural gas. Natural gas quoted at $1.81 per MMBtu on the New York Mercantile Exchange on Sep 23 intraday and then jumped 9% at $2.02. Data provider Refinitiv said output in the Lower 48 US states was on track to fall to 83.8 billion cubic feet per day (bcfd) on Wednesday, its lowest since August 2018.
As low prices earlier this year prompted energy firms to cut back on drilling by so much that the amount of gas from new wells was no longer enough to cover declines at existing wells. The rig count fell to a record low in mid-August. It is noteworthy that the November contract for natural gas is now trading at $2.66 a staggering $0.70 premium over the front-month contract. The fall in front-month contract natural gas prices is so far 11.47% to $1.813 on Monday the most significant one-day drop over the last 21 months.
Despite the sharp declines, the fuel is up nearly 35% since 25 June when natural gas fell at $1.43 to its lowest level since 1995 due to weak consumption from a warmer-than-expected winter 2019-2020 and a coronavirus-induced drop off in usage. The rebound traces its origins to three factors: a ramp up in air conditioning use on the back of a scorching summer, lower associated gas output tied to the brake in shale oil production growth, and steady improvement in shipments of LNG for export.
The latest uptick puts total natural gas stocks at 3.614 trillion cubic feet (Tcf), 17.4% or 535 Bcf above the 2019 levels at this time and 421 Bcf (13.2%) over the five-year average. As per EAI, US stockpiles held in underground storage in the lower 48 states rose by 89 billion cubic feet (Bcf) for the week ended Sep 11, higher than the guidance (of 77 Bcf gain). The increase was also above the five-year (2015-2019) average net addition of 77 Bcf and last year’s build of 82 Bcf for the reported week.
IHS Markit analysts expect the tightening supply/demand balance to lift Henry Hub cash prices to the $2.50 range by year’s end, up from an average near $1.80 in September/October, and to around $3.40 by February/March. This compares to the firm’s $1.87 forecast for full year 2020 and is on par with the Energy Information Administration’s (EIA) most recent Henry Hub price outlook.
(Disclaimer: This analysis is only for educational purpose and is not and must not be construed as investment advice. It is analysis based purely on economic theory and empirical evidence. Readers are requested to kindly consider their own view first, before taking any position.) Date: 24-9-2020