Does Natural Gas Truly Have A Supply Problem?

Natural gas prices have soared recently, with prompt month pricing reaching its highest level since early 2019, settling almost dead-on the $3.50 level Friday.
 

This surge has been fueled by fears that there is a sufficient supply / demand imbalance such that there may not be adequate natural gas supplies heading into the upcoming winter. These fears only strengthened following the natural gas EIA storage report back on Thursday, showing a build of only 55 bcf for the week ending 6/18.
 

This reflected a supply / demand balance that is very tight, or imbalanced, despite the rise in prices. As the saying goes, low prices are the cure for low prices, and high prices find a way to be the cure for high prices, via changes in the supply / demand balance, but to this point, we have yet to see the gain in price lead to a sufficient balancing in the market to reduce the fears of a coming shortage. Yes, the 55 bcf build in last week's report was somewhat a product of a "perfect storm" of factors, aided by low wind, and lower nuclear output, which put more of the burden on natural gas to meet demand, but in looking at projections for this week's report, we still are projected to be under the 10-week trend line when looking at storage change compared to Gas-Weighted Degree Days (GWDDs), a measure of demand, not counting exports.
 

As a side note, notice how far below the trend line last week's build was. The point is, while the balance reflected in upcoming reports should easily be weaker than the balance reflected in last week's report, it is relative weakness, and not yet enough weakening to alleviate fears of a shortage. Using the average balance of the last two weeks vs the 5-year average, and extrapolating forward, we find that we would be at risk for end-of-season storage levels even under where we ended injection season back in 2018, assuming such a balance continues.
 

This experiment also factors in our weather expectations moving forward, which are skewed to the hotter side of normal, adding even more demand to the picture. June will finish as one of the highest demand Junes on record, as measure by GWDDs.
 

The pattern looks set to run on the hotter side in July as well, with our projection on the high end in our historical dataset for July as well.
 

So, with supply / demand balances running very tight, even despite the price increase, a weather pattern that favors generally above normal demand in the foreseeable future, and export levels that should remain strong, given global natural gas prices, where will the balancing come from? The most obvious place to look is production, though gains here have been very minimal over the last four months.
 

Certainly, one would think the massive rise in prices will bring on additional production sooner rather than later, but an important note is that, over the last 5 years, production's increase from this time of year through December has averaged around 4 bcf / day, so measuring against the 5-year average balance already factors in some production gains.

In short, while 3 to 4 months is plenty of time for things to change, as it stands right now, the risk of heading into winter with storage levels that are precariously low is real. This risk makes weather even more important moving forward, not just for the remainder of summer, but even more so as we inch closer to winter, as a truly cold winter under such a low storage scenario would make natural gas prices quite explosive, while a warm winter would again leave bulls as road kill.

We will be monitoring weather signals very closely, as we always do, along with monitoring day-today changes in key fundamentals data in order to detect changes in supply / demand balances, and assess future price risks.