Thursday, August 15, 2019 at 7:10PM
The tendency for the weekly EIA reports to throw surprises at the natural gas market is duly noted, and today's report did not disappoint in that regard, revealing that we injected only 49 bcf last week, well under our internal estimate as well as the market consensus. As a result, natural gas prices surged higher, testing the 2.25-2.27 resistance zone in the September contract before closing a little off those highs, but still up nearly 9 cents on the day. When comparing this number to the last 10 weeks, the tighter supply / demand balances reflected are quite noticeable. Looking at only this gas week in previous years, it does not look as tight, at first glance. Two things must be pointed out, however. One, the balances reflected are about on par with the same week last year. Two, and this is more important, this all occurred despite much lower LNG intake recently, including for the week reported. Obviously, one can infer an even stronger number had we been at "normal" LNG intake levels. So, what happened? Does this finally represent the paradigm shift in the natural gas market that bulls have been hoping and waiting for? First off, the week was a hotter one compared to normal in some key areas. This was the start of the strongest run of heat seen in Texas all summer long, which is one of the most important regions when it comes to natural gas usage. It is possible that the stronger heat there took more of a toll than standard supply / demand models indicated. Wind generation was also low for much of the week, promoting more use of natural gas in power generation. In our view, it is difficult to explain the miss solely with these weather factors, however. We did have the pipe explosion a couple of weeks ago in Kentucky, forcing the re-routing of gas through the region, which may have played a role in things as well. There are also rumors that there may have been some "line packing" into the Gulf Coast Express pipeline, expected to begin service over the next several weeks. All in all, this is an encouraging first sign of life for natural gas bulls, especially with LNG anticipated to return higher soon, but we must be cautious before declaring it a game changer. If this was simply related to pipeline issues, then nothing material has actually changed yet. In addition, EIA reports have been very erratic anyway. Two weeks ago we were hit with a very bearish report, followed by a rather neutral one last week, and then this week's bullish surprise. Some consistency would be appreciated before reading too much into any one number. As a side note, tightening of supply / demand balances is something we believe can be expected as we head into the end of summer. We just have a more difficult time reconciling the build in this report singularly. Want to find out what our unique approach connecting weather and natural gas fundamentals suggests for end-of-season storage levels, and how we feel prices are more likely to react as we move forward? Sign up for a 10-day free trial here to take a closer look at all of our research and products.