Forex▼ Bearish
Natural Gas Rally Hits Production Wall as Freeport Stays Offline
Nymex natural gas rallied 3.1% on hotter weather forecasts, but 111.6 Bcf/day production and a storage surplus cap the upside. Thursday’s EIA report decides whether the heat is real.
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Nymex natural gas futures snapped higher Tuesday after hotter weather models put prolonged heat back across the South and West through the end of August. Monday’s gap lower came on cooler forecasts for the Midwest and Northeast. The new models pushed back on that trade hard enough to recover nearly the entire prior session’s loss. Shorts covered and buyers stepped in.
The rally is running into 111.6 Bcf per day of production and a storage surplus that has not tightened despite weeks of summer heat that was supposed to do the job. The 50-day moving average is still a long way overhead. Tuesday’s move is a bounce, not a breakout.
The contract reached $2.778 during the session after trading as low as $2.692. The recovery took out Monday’s retracement zone resistance and reclaimed the ground that the gap lower surrendered on the opening. At 18:45 GMT, September natural gas futures were trading at $2.774 per million British thermal units, up $0.084 or 3.12%.
Lower-48 dry gas output has averaged about 111.6 Bcf per day in August, above July’s record monthly average of 110.7 Bcf per day. Producers have not flinched at lower prices. Associated gas from Permian oil drilling keeps adding supply whether the gas market wants it or not. Oil producers do not stop drilling because natural gas prices soften. The gas comes with the oil. Haynesville production is also running full.
Freeport LNG maintenance has kept roughly 2 Bcf per day of export capacity offline since July. That gas has stayed in the domestic market at the worst possible time, piling into storage during the weeks when summer demand was supposed to be drawing the surplus down. Feedgas deliveries to the nine major U.S. LNG plants have averaged about 17.3 Bcf per day this month, slightly above July and close to the June record. Freeport is the missing piece. The maintenance is expected to wrap up later this month. Tuesday’s rally priced the heat, not the export recovery, and that recovery has not started yet.
Houston is expected to average near 100 degrees Fahrenheit from August 20 through August 23, about five degrees above normal. The Texas power grid could set another demand record if the heat holds and wind generation drops during peak hours. Monday’s cooler models had the market thinking cooling demand was fading into the shoulder season. Tuesday’s models changed that view overnight.