Natural Gas Gets Support From Possible Coal-To-Gas Switching, 1-Month Outlook Bearish

Includes: UNG
by: Hard Assets Investor

By Sumit Roy

Natural gas was last trading up by more than 2% to $3.54/mmbtu after the Energy Information Administration reported that operators injected 57 billion cubic feet into storage last week, below the 60 to 70 bcf build most analysts were expecting. The build was above last year's build of 47 bcf and equal to the five-year average build of 57 bcf.

In turn, inventories now stand at 3,063 bcf, which is 245 bcf below the year-ago level and 46 bcf above the five-year average (calculated using a slightly different methodology than the EIA).

The weather last week was cooler than seasonal norms and cooler than the same period a year ago. The Edison Electric Institute said that utilities generated 81,888 GWh in the week ending Aug. 17, which was 5.2% below the same week a year ago.

Looking forward, the NOAA's six- to 10-day outlook is calling for warmer-than-normal weather across much of the country during late August and early September.

NOAA Six- to 10-Day Outlook

Meanwhile, the number of rigs drilling for natural gas in the U.S. rose by two to 388 last week.

Natural Gas Rig Count

Natural Gas

Bottom line: The latest inventory data from the EIA were neutral-to-bullish, as surplus against the five-year average remained unchanged at 46 bcf. On a weather-adjusted basis, the injection looks bullish. Temperatures were cooler than the five-year average, yet the build was equal to the five-year average. This week's injection along with last week's smaller-than-expected injection suggest that we may have seen a bit of coal-to-gas switching kick in after prices fell below $3.20/mmbtu earlier in the month. That's supportive of prices, of course, but on the flip side, that demand will evaporate at higher price levels.

Our very-short-term outlook for natural gas remains bearish, as we see a distinct risk of outsized inventory builds during the low-demand season this fall, just as we saw during this past spring. We will be looking for buying opportunities later in September.