Natural Gas Traders See Well-Supplied Market Ahead of Winter

By:Thomas Westwater

Meanwhile, the selloff continues after Hurricane Beryl forced export terminals to suspend operations

Natural gas prices fell over 6% today, extending the selloff.
U.S. exports are crimped after storm damage to export facilities in Texas.
Storage spread points to soft market expectations into winter.

Natural gas prices fall to lowest since early May

Natural gas prices continued to sell off today, with the August contract (/NGQ4) slipping over 6% through morning trading. That put prices at the lowest level since early May at 2.073 per million British thermal units (mmBtu).

The selloff comes after Hurricane Beryl moved through Texas, forcing liquified natural gas (LNG) export terminals to suspend operations. The hurricane damaged privately held Freeport LNG’s liquefaction plant, causing a complete shutdown of its three trains. Freeport said it would start a train this week with the other two to start shortly after.

The outage is causing supply to build up faster than it otherwise would in the United States. Over 3 million people in Texas lost power after the storm, and 90,00 are still without power as of today, according to poweroutage.us.

Summer demand hopes collapse, softening outlook into winter

Just over a month ago, natural gas prices traded at the highest levels since January as hotter-than-normal temperatures across the U.S. boosted demand hopes. We’re about 35% off those highs. Weather forecasting for the next two weeks isn’t supportive, with the National Weather Service predicting cooler seasonal temps across most of the Southern United States.

U.S. stocks rose 65 billion cubic feet (bcf) last week, bringing inventory 504 bcf above the five-year average, according to the Energy Information Administration (EIA). The EIA’s July 9 short-term energy outlook (STEO) expects total inventory to rise to 3,968 bcf by November. That would be the highest level since November 2016. Nevertheless, the STEO forecasts higher prices into the winter as exports and consumption rise.

But the futures market disagrees with that price forecast. The difference between the October contract (/NGV4) and the January contract (NGF5) slipped to a fresh low of -1.301 today, indicating a soft physical market going into the winter.

A healthy level of stockpiling in Europe this summer will likely hamper export pressure if the continent avoids an unusually cold winter. According to the Aggregated Gas Storage Inventory (AGSI), European Union natural gas inventory is 81.38% full as of July 16.

EIA numbers in focus

The EIA reports updated weekly inventory data tomorrow. Traders expect a build of 55 bcf for the week ending July 12, although it will likely exceed those estimates in my opinion, given LNG exports remain below capacity.

Trading natural gas

Buying now exposes you to a lot of risk, given the downward momentum. However, an area of congestion around the two handle offers an area of possible support. If prices start to consolidate, it could set a base to potentially play a technical bounce as shorts take profit from the past month’s selloff.

That said, a risk-defined trade using options is probably the best way to play the long side. There is some decent premium in October contract (/NGV4) after a volatile month of trading, with an expected move of +/- 0.58 points. Based on directional bias, this could make selling a put or call spread an attractive trade.

Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater

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