As analysts and traders mulled continuing signs of tightness in the supply/demand balance from the latest government inventory data, natural gas futures advanced several cents in early trading Friday. The October Nymex contract was up 6.3 cents to $4.704/MMBtu at around 8:50 a.m. ET.
The Energy Information Administration (EIA) on Thursday reported a 20 Bcf injection into Lower 48 gas stocks for the week ended Aug. 27, a bullish print versus expectations. Inventories ended the period at 2,871 Bcf, versus 3,450 Bcf in the year-earlier period and a five-year average of 3,093 Bcf.
“Tightness in the South Central region remains the story du jour, with the 22 Bcf draw significantly tighter than the five-year and widening the gap to the five-year average to 9% at 948 Bcf,” analysts at Tudor, Pickering, Holt & Co. (TPH) said of this week’s EIA data.
This comes as shut-ins in the Gulf of Mexico (GOM) have impacted natural gas production, “bolstering balances even as power generation demand trends lower seasonally,” the analysts said.
While “time will tell” how long the outages last in the GOM, the TPH team pointed to power generation demand as a “key focus” for the natural gas market heading into the shoulder season.
Recent data showed overall thermal generation down amid stronger renewable generation, with gas’ share of thermal output falling to 59% versus recent levels of around 60-62%, according to TPH. Gas is still enjoying a larger share of thermal generation compared to the 58% the firm had modeled at current prices.
“With early forecasts for above average temperatures through mid-September, we’ll be watchful for a pickup in gas-to-coal switching, though recent data appear to confirm our modeled estimate of peak coal generation in the 3.4-3.5 TWh range, suggesting warmer temperatures could limit our expectations for pressure on power generation demand for natural gas,” the TPH analysts said.
As for the latest forecast outlook, there were no major changes overnight from the major weather models, according to NatGasWeather.
Models still show light national demand through Saturday, with demand expected to then increase slightly late in the weekend into the start of next week on hotter temperatures for much of the western and southern United States, the firm said.
“However, more fall-like cool fronts are expected into the Midwest and East next week, with highs of 60s to lower 80s to ease national demand back to seasonal levels,” NatGasWeather said.
Natural gas prices are set for more volatility ahead of the long Labor Day weekend, the firm said.
The bullish EIA print Thursday “suggested the supply and demand balance is tighter than anticipated, with deficits increasing to 222 Bcf,” NatGasWeather said. “…This isn’t a huge supply deficit when considering the last time prices traded over $4.50, deficits were more than 600 Bcf. With that said, deficits will continue to increase unless stronger U.S. production occurs to help loosen the balance.”
October Nymex crude oil futures were up 32 cents to $70.31/bbl at around 8:50 a.m. ET.