Natural Gas Rallies Ahead Of Tomorrow's EIA Data

August natural gas prices rallied 4% today ahead of the Energy Information Administration's data release at 10:30 AM EDT tomorrow that will outline the estimated amount of natural gas currently in storage. Last week, a slight miss in the EIA number sent prices shooting up over 7% today, and clearly traders had jitters today ahead of the number. Though we spend a significant amount of time focusing on weather's impact in the market, there are certain times when other impacts, such as storage numbers, are significant price drivers, and this looks to be one of those times. Even with this rally and the chance of the first mid-summer draw from storage since 2006 (when entirely different market fundamentals were at play), prices were unable to break above resistance in the $2.87-$2.91 region we have been watching. 

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This came as the entire natural gas curve kicked out from yesterday, though notably Spring 2017 contracts are still lagging below the levels they sat at last month. 

This afternoon, as we do during the middle of every trading week, we released our Weekly Model Verification Update that briefly looks into which models have been performing best this week and which biases to keep looking out for. As we have shown before this summer, a number of models have been holding a short-term warm bias. The operational GFS has been one of the worst offenders of this short-term warm bias, but actually most models have been modestly too warm at the surface 10 days out. 

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Yet when looking out to the long-range forecast, and shifting the view to the 500mb level, there was less of a warm bias observed. Instead, we observed the GFS ensembles verify correctly with their ridging signal across the center of the country, while the CMC ensembles reverted to their bias of having too strong a ridge across the Pacific Northwest. (These 500mb model images are courtesy of Tropical Tidbits.) 

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The result is that initially, the natural gas market may have priced in modestly too much bearish risk, as there appeared to be the risk for cooler weather across the East 14 days ago. Some of this did verify, though cool weather did not get as far into the South/Southeast as appeared possible. Similarly, through the summer we had been noting that the CMC ensembles had been beating the GFS ensembles slightly more than they were getting beaten, indicating they deserved at least equal weight. Here they were quite off with the forecast. 

Now, with at least some attention still on the long-range forecast, we see the Day 14 forecast from the recent 12z GFS ensembles calling for warmer temperatures still across the center of the country with only limited cool risk across the East. 

That cool risk across the East is something the CMC ensembles had been showing more consistently (and recently backed off a bit), but is also something we were warning clients earlier this week could arrive based on a number of other teleconnections (what we refer to as atmospheric indicators used to identify broad atmospheric patterns). Still, the cooler signal is quite weak compared to the more impressive heat signal we see from the Midwest to the South. Should this impressive heat carry over into the middle of August, we could continue to see natural gas storage injections be quite limited, leading to these occasional price spikes. As we have outlined before, already this summer storage injections have been very lean when compared to historic levels. 

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Moving into the day tomorrow, all traders will be eyeing the EIA data print, which should drive price action through the day. As we move into the weekend and next week, however, further attention may turn to the longer-range forecasts to see how long powerburns will linger significantly above average through August. So far, forecasts remain quite hot, and if that heat lingers even longer than we currently expect through August another test of $3 may be possible. However, if some of those early cooler trends receive confirmation in the coming weeks and limit more cooling demand across the South/Southeast than they are currently forecast to, prices could really fall back as we see injections into storage rise rapidly through late summer. This would only exacerbate problems we have at already record high inventories. 

Lots of natural gas volatility can be expected tomorrow off the EIA data print. However, it may be the weather (and also ensuing production data) that determine whether any violent moves tomorrow are just noise or the broader beginnings of a trend.