The year-over-year inventory surplus continues to decline, but the pace slowed last week.
Natural gas was steady today near $3.10 after the Energy Information Administration reported that operators injected 26 billion cubic feet into storage last week.
The figure was in line with expectations, but below the year-ago and five-year average injections of 43 bcf and 80 bcf, respectively.
In turn, the inventory surplus continued to decline, but as expected, that decline has begun to slow.
Overall, the near-term backdrop of the natural gas market remains the same. Prices are gradually moving higher; the inventory surplus is moving lower; output remains stubbornly high; and the rig count continues to move lower.
Indeed, the rig count hit a fresh 13-year low last week at 518.
Gas output remains the unknown factor that could dramatically alter the market’s outlook over the medium term. But in the near term—at least through the rest of the injection season—we do not anticipate that it will have a meaningful impact.
Rather, we anticipate that prices will respond to inventory movements. If the year-over-year surplus continues to decline, prices should stay supported. But as we’ve said, over the next month, the pace of that decline may slow.
Last week, inventories rose by 26 bcf in a week that was relatively warm, with 93 cooling degree days (CDDs). In the same week a year ago, inventories rose by 43 bcf on 95 CDDs. Similar weather makes for an easy comparison and suggests that last week the market was 2.5 bcf/d tighter than a year ago.
In prior weeks, similar comparisons have suggested a market that was even tighter—5, 6, even 7 bcf/d tighter than a year ago.
Some industry observers have suggested that this could be a sign of a reversal in the coal-to-gas switching trend that has supported demand throughout this year. But that is not clear.
In our view, the amount of coal displacement is not constant and is more evident during periods of lower electricity generation. If this is correct, the year-over-year natural gas surplus should begin to decline swiftly again in September and October.
Prices may remain range-bound just above and below $3/mmbtu before making their way to $3.50 and higher.
Contact Sumit Roy at [email protected].