The market for natural gas in the United States continues to seesaw back and forth, with a recent bout of optimism threatened to be dashed as inventories climb at a faster rate than expected.
Natural gas prices have been under tremendous pressure in recent years as record levels of production have left markets flush with supply. Also, the most recent winter was extraordinary mild, leading to the highest levels of natural gas sitting in storage in decades. That led prices to crash below $2 per million Btu for much of the year to date.
However, market sentiment seemed to have turned once again in recent weeks on the prospect of a hot summer combined with shrinking supply. The prolific shale basins – most notably the Marcellus Shale – have seen output start to decline as both low oil and low gas prices continue to scare away drillers. The slightly more bullish market allowed Henry Hub spot natural gas prices to rise above $2.60/MMBtu, a sharp rise of more than 40 percent in just the past month alone.
But, hopes were somewhat dashed this week as bearish signals returned. Natural gas storage levels grew at a faster pace than expected, according to the latest EIA estimates. Stocks rose by 62 billion cubic feet (bcf) last week, higher than the 59 bcf expected by market analysts surveyed by The Wall Street Journal.
Meanwhile, weather forecasts have cooled lately, pointing to less summer demand than natural gas traders might have hoped. Next week the Midwest is expected to see a spurt of cool weather. “The bullishness of the (weather) is starting to look priced in, and now the risk is (going) lower if the demand side starts to falter,” Scott Shelton, a broker at ICAP PLC told the WSJ. The latest data release is “marginally bearish. It’s definitely not game-changing bearish, not yet.” Related: NASA May Have Just Transformed Aviation With 100% Electric Plane
In fact, the impressive price rally itself tends to decrease the chances of further gains. Higher natural gas prices have a way of eating into demand – as natural gas prices rise, utilities can lean harder on their coal-fired power plants, paring back gas generation. That could cut into demand for gas, putting a cap on the latest price rally.
Moreover, there are seasonal trading factors that suggest a rally could be reaching its limits. Carley Garner, a commodities expert and co-founder of DeCarley Trading, told CNBC that the market tends to bid up natural gas prices in the spring ahead of an expected spike in demand during summer months. But the price gains are always temporary. Looking at historical price changes, natural gas prices tend to decline in June after the market has priced in summer demand. If the price rally falters, Garner expects natural gas spot prices to fall back to between $2.09 and $2.18/MMBtu, or roughly 20 percent lower than today’s prices. "If she is right, you might want to ring the register on the booming nat gas stocks like Range Resources or Southwestern Energy," Jim Cramer, host of “Mad Money,” said of Garner’s projections. "Given her track record with commodities, it might be a good idea to take some profits in the natural gas producers. Nobody ever got hurt taking a profit," Cramer added.
Other analysts agree. With natural gas storage levels still well above the five-year average for this time of year, there is smaller opportunity on the upside. Also, storage levels could continue to rise towards a record high later this summer. “At $2.75, with over 3 (trillion cubic feet) in the ground, it looks like the rally might be overextended,” Gene McGillian, an analyst at Tradition Energy, told the WSJ. “We need to see more evidence that reduced drilling and increased demand is making a material difference.”
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By Nick Cunningham of Oilprice.com
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