- Natural gas prices in the near term are pricing in perfection.
- Production maintenance combined with higher heating demand resulted in larger deficit, but as production returns and heating demand wanes, so too will prices.
- While we agree the market balance will be tighter going forward, especially versus last year, summer gas trading usually sees limited upside due to gas-to-coal switching.
- Looking for a helping hand in the market? Members of HFI Research Natural Gas get exclusive ideas and guidance to navigate any climate. Learn More »
June natural gas prices are down day as the market starts to weigh the impact of higher gas prices to power burn demand while production makes full recovery.
According to our model update, we have natural gas storage builds lower by 14 Bcf with 4/30 week showing a build of +65 Bcf. As you can see in the chart above, we are going to see a 21 Bcf deficit over the next 5 reports versus the 5-year average.
But despite the small deficit, we are seeing the market loosen a bit as production makes a full recovery back to ~92 Bcf/d. The deficit has narrowed to just -0.6 Bcf/d.
Looking at the fundamentals, production has fully recovered which would put pressure on prices near term. The market is somewhat overlooking this because total gas demand is at an all-time high for this time of the year.
The elevated demand is the result of these four variables:
Power burn demand has improved due to better economic activity and early start to cooling demand in key regions. Industrial demand is materially higher y-o-y due to mandatory lockdowns last year. And the exports continue to be at all-time highs for this time of the year.
One thing to note is that power burn demand will be the biggest demand contributor during the summer cooling season, so if prices get too high, utilities will switch from gas to coal dampening demand and reducing the upside. Traders we surveyed indicate we are already approaching this price ceiling as utilities look to use more coal. If so, this could present us with a short opportunity down the road. We continue to urge to wait for the set-up to become too obvious before taking a short position.
On the production side, you can see that we are going to be seeing massive y-o-y increases. With production now at ~92 Bcf/d and all the related maintenance over, we are a bit hard-pressed to not see prices come down a bit near term.
The market is pricing in near perfection for this summer with much warmer than normal weather in the curve. Again, we are not shorting just yet, but it's something we are watching closely.
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