As of 12:35 PM EDT today, the daily change along the natural gas futures strip looks odd. As seen below, it is now the winter contracts that are lagging the most on the day, albeit by just about a cent more than the front-end contracts.
This creates the interesting look of a day where thus far the V6/F7 spread has actually come in a small bit but prompt month prices are down slightly.
On its face value, it could be seen as short-term supportive for the front-end that they are seeing more support than the winter contracts, especially because the entire day the winter contracts have been lagging the most. However, much of this is likely due to Henry Hub spot prices remaining quite elevated when compared to even the prompt month September contract. The prompt month declines yesterday were far mode defined than cash declines, and these elevated cash prices (fueled in part by hot weather continually keeping cooling demand elevated) have seemed to keep prompt month prices from selling off as much.
The result is that we saw prompt month prices able to bounce off support today. Both the 10 and 20-day moving averages for the September contract sit around $2.73, which was briefly tested this morning before prices rallied back. Now, prices are wandering around the 30-day moving average as well near $2.76. On a more longer-term scale, their inability to break above $2.90 last week creates a lower high as compared to July 1st, which could increase downside risk.
In the meantime, traders will continue to focus on near-term forecasts for Population Weighted Cooling Degree Days (PWCDDs) to be 14% above average through the next 7 days, continuing to help support cash prices.
The result of this "cash backwardation" is it can be an incentive for those holding natural gas in storage to withdraw it from storage and sell it at current prices instead of continually holding their stockpiles or injecting more into storage while the prompt month future sits decently lower. It appears that this played a rather significant role in the EIA data miss last week that showed a leaner storage build than expected, and a similar phenomena is likely to bring about a record low storage build for the upcoming week (with a few analysts even calling for a very small storage drawdown). As can be seen, last week's storage injection came in decently below even the storage change for the same week in 2012, the last time we had a similarly-sized glut.
Even with that small injection, we continue to see natural gas stockpiles remain above the 5-year maximum (from back in 2012). The very lean injection projected this week will still not be enough to return us back within the 5-year range despite again being smaller than for the same week in 2012.
These large stockpiles have some concerned that should weather not be as supportive to begin the winter, we could see large storage injections without much room left in storage, bringing us into the winter with still record stockpiles. These storage concerns (and indications that production is still not significantly fall of) have capped upside in natural gas prices the last couple of weeks. Thus, despite the miss in EIA data last week and another bullish report expected today, prices have been unable to significantly break upwards, as once cooling demand begins to seasonally fall off we could see cash prices fall off more significantly. Just today we released our Weekly Climate Update to clients outlining our forecast weather expectations within the natural gas market through February 2017, highlighting where the largest bullish and bearish risks will be along the strip and how we expect that to impact prices heading into the winter.
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