Natural Gas Outlook Neutral On Back Of Steadily Falling Inventory Deficit, Spotty Summer Heat

Includes: UNG
by: Hard Assets Investor

By Sumit Roy

Natural gas fell modestly to last trade near $3.90/mmbtu after the Energy Information Administration reported that operators injected 91 billion cubic feet into storage. That was the high end of analyst estimates, which ranged from 84 to 92 bcf. The injection was above last year's build of 62 bcf, and above the five-year average build of 84 bcf.

In turn, inventories now stand at 2,438 bcf, which is 568 bcf below the year-ago level and 43 bcf below the five-year average (calculated using a slightly different methodology than the EIA).

The weather last week was close to seasonal norms. The Edison Electric Institute said that utilities generated 80,937 GWh in the week ending June 15, which was 1.2% below the same week a year ago.

Looking forward, the NOAA's six- to 10-day outlook calls for warmer-than-normal temperatures across much of the country.

NOAA Six- to 10-Day Outlook

Meanwhile, the number of rigs drilling for natural gas in the U.S. fell by one to 353 last week, remaining close to 18-year lows, according to Baker Hughes.

Natural Gas Rig Count

Natural Gas

Bottom line: The latest inventory data from the EIA were neutral, as the deficit vs. the five-year average fell from 50 bcf to 43 bcf. The current natural gas market looks balanced or slightly looser than normal, as evidenced by the slow but steady decline in the inventory deficit. This is in contrast to the market this past winter, which looked tighter than normal. Of course, the dynamics of the market in the summer are different than those in the winter.

In terms of weather, while the NOAA's latest weather forecasts continue to show the potential for warmer-than-normal temperatures across much of the country, the heat thus far this summer has been inconsistent. Based on current trends, the outlook for the natural gas market looks neutral, and range-bound price action between $3.50/mmbtu and $4.20 is expected over the next two months.