Natural Gas: Seasonal Slowdown In Order…
Warmer temperatures are finally starting to arrive here in the US. In fact, most areas of the US are expected to see slightly above average temperatures for May, June, and July according to the National Oceanic and Atmospheric Administration (NOAA) three-month outlook.
Not surprisingly, this warming trend has the price of natural gas on the downswing.
Take a look…
As you can see, Henry Hub spot natural gas dropped from $4.40 mmBtu down to $3.98 in the past few weeks.
But as you may know, this is expected as natural gas usually exhibits slight seasonal weakness this time of year. That’s because cold temperatures are on the way out and working gas storage builds are on the way in.
Speaking of natural gas in storage…
The Energy Information Administration (EIA) released their weekly natural gas storage report yesterday. For the week of May 3rd, working gas in storage rose to 1,865 billion cubic feet (bcf). That’s an 88 bcf increase from the previous week and in-line with analysts’ expectations.
While the first few weeks of storage buildups usually take the wind out of the bulls’ sails, it’s important to note that inventories are still below average. In fact, current storage is 28.3% below last year and 5% below the 5-year average.
Here’s a look at storage trends courtesy of the EIA…
As you can see from the blue line in the chart above, natural gas in storage is just starting to turn higher after months of declines. But more importantly, the blue line is towards the bottom of the shaded area, which represents the 5-year average inventory range.
While there’s no doubt we’ll see growing inventories in coming months, it’s highly unlikely gas in storage jumps to levels seen last year. And that means the price of natural gas should stay relatively firm over the next few months. At worst, we may see natural gas re-test the $3.50 mmBtu range this summer.
But like I said in a previous article concerning natural gas- if temperatures are extremely hot like last summer, we may see natural gas hit $5 by year-end.
Why?
US gas production most likely won’t be strong enough to support cooling demand. That’s because the dry gas rig count for the first week of May was 354… an 18 year low.
Natural gas companies have essentially stopped drilling for natural gas. And more importantly, they’re not going to resume exploration until it makes economic sense. For most gas plays in the US, it doesn’t make sense until prices are well above $5 mmBtu.
Bottom line…
Don’t be surprised to see choppy trading for natural gas in coming months. But as time goes on, fundamentals will likely keep shifting in favor of the bulls. As long as demand grows while exploration sits at a virtual standstill, inventory levels should stay below the 5-year average.
And that means the price of natural gas will likely keep a bullish undertone.
How can you capitalize on this situation?
One of the easiest ways is through the US Natural Gas Fund (UNG). UNG is an exchange-traded fund designed to track the price of natural gas.
Until Next Time,
Justin Bennett
Category: Energy, Natural Gas
