Natural Gas Holds Firm as ERCOT Demand Hits Record

Natural gas futures settled higher Friday as weather models turned hotter across Texas, the Southwest and the Interior West. The shift runs through September 4. West Texas is expected to see record heat over the next week, and ERCOT projects peak power demand from Friday through Tuesday will exceed the all-time high set in July.

Power generators burn more gas when air conditioners run at that level. The demand side finally has a short-term story worth trading. The problem for buyers is that supply is still working against them. Storage is heading for a 10-year high by the end of October. Production is running 4.4% above last year. LNG export flows slipped from the prior week. And more Permian gas is set to reach Henry Hub in September when the Hugh Brinson pipeline reaches full capacity.

The EIA reported a 16 billion cubic foot build for the week ended August 14, above the market estimate of 14 billion but below the five-year average of 29 billion. As of that date, inventories were 6.2% above the five-year seasonal average. The EIA projects U.S. storage will reach 3,985 billion cubic feet by the end of October, the highest level in 10 years. Record heat is keeping power burn elevated. It is not keeping storage from filling.

Lower-48 dry gas production hit 113.1 billion cubic feet per day Friday, up 4.4% from a year ago. Demand was 80.9 billion, up 2.7%. Production is growing faster than demand. That gap has not closed even with record heat pulling gas into the power grid.

LNG net flows to U.S. export terminals were 17.7 billion cubic feet per day, down 2.6% from the previous week. Domestic production rising and export demand falling at the same time is not the combination bulls wanted heading into September.

Baker Hughes reported active U.S. natural gas rigs fell by one to 127 in the week ended August 21. The rig count remains close to the three-year high of 134 reached in February. One rig is not a retreat. Nothing in this report changes the production outlook.

Energy Transfer said the Hugh Brinson pipeline will reach its full capacity of 1.5 billion cubic feet per day by September 1. The pipeline moves more Permian gas to Henry Hub, adding to supply at the benchmark delivery point just as injection season nears its peak. The weather is hot now. Additional pipeline capacity arrives in early September and that supply does not care about the temperature in West Texas.

Technically, September futures traded quietly Friday. Buyers faced resistance inside the $2.798 to $2.840 retracement zone. Support held inside the $2.746 to $2.715 zone. The main trend turned up last week when buyers took out $2.830 and reached $2.875. The next upside barrier is the 50-day moving average at $2.920. Without a fresh catalyst, the market is likely to remain range-bound with a slight downside bias, Hyerczyk wrote.

European storage was 62% full as of August 19, below the five-year seasonal average of 79%.

The medium-term weather risk is a powerful El Niño pattern that could bring warmer-than-normal conditions to the Northern Hemisphere this fall and winter. That is not Friday's trade, but it will move closer as summer ends.

The next weather forecasts are the immediate trigger. Buyers need the heat centered on Texas and the Southwest to hold long enough to keep ERCOT demand near record levels. Any model change that shortens the hot pattern or pulls temperatures back removes the bid.

Production and LNG flows are the supply-side numbers that matter with the next update. The Hugh Bronson pipeline coming online in September adds more Permian gas to Henry Hub just as the market heads into the final stretch of injection season. Hot weather can keep natural gas supported in the short term. It has not changed the larger supply story.

The market is stuck between two retracement zones with the 50-day moving average overhead at $2.920. That range holds until something on the fundamental side breaks it.