Supply/Demand Balances Tightening In Natural Gas Market, But Is It Enough To Lure In Buyers?

We have documented the impact the COVID-19 economic shutdowns had on natural gas demand, leading to supply/demand balances that would easily fill storage before reaching the end of injection season, risking a potentially large crash in front-month prices, even from already low current levels, but over the last few weeks, many parts of the economy have re-opened, and we are seeing the results of this by way of tightening balances reflected in the last couple of weekly EIA reports. This would include our estimate for this week's number as well.

But there is some added uncertainty as we move forward. The primary reason for this is the decline in LNG feedgas we referenced last week.

In addition, crude oil prices have been on a steady rise over the last few weeks, raising concerns that shale production will quickly return, meaning we gain back some natural gas supply in the form of associated gas from regions like the Permian.

Both of these factors mean we may need to see even more gains on the demand side in order to keep balances tight enough to avoid storage containment this Fall. That is doable, given that demand has not yet reached pre-COVID levels, and we also have summer weather in front of us. On that front, we are currently projected to outpace last year's weather demand over the 15 days at least.

This is important to track because we know Summer 2019 was yet another hot overall summer, and this year, we have added support for a potentially hotter scenario thanks to a budding La Niña, evidenced by cooler waters building in the equatorial Pacific.

Summers that occur during a transition into a La Niña base state are known for being quite hot, nationally, relative to normal, with the list of such cases containing many summers that have ranked in the top 10 hottest summers on record, per GWDDs.

In conclusion, the gains on the demand side are material the last few weeks, and a hotter summer would greatly provide assistance in this regard as well, but with the LNG situation, as well as the potential for some production to come back online, we remain at a stalemate for now. Since becoming the new "prompt month", we have seen lower volatility in the market, as the market waits to see which way to move next.

The October-January (V/F) spread also remains at historically wide levels, indicating that the market is not ready to remove containment risks just yet, which makes sense with all of the uncertainties we've discussed.