Nat gas prices poised to fall as summer heat fades

OREANDA-NEWS. July 26, 2016. US natural gas futures are poised to head lower in the coming weeks as summer cooling demand passes its peak and concerns over higher production, a drop in fuel switching and record seasonal inventories weigh on prices.

Even a US government report last week showing the smallest injection of the summer so far and forecasts indicating that temperatures will reach a zenith this week failed to lift prices significantly.

"These smoking hot forecasts are keeping prices above \\$2.50/mmBtu," said Gelber & Associates analyst Kent Bayazitoglu, yet the market appears to be looking beyond the short term to larger storage injections and cooler weather this fall.

Prompt-month gas prices for delivery at the Henry Hub settled today at \\$2.747/mmBtu, up by about 1pc from a week earlier but well below the 13-month high of nearly \\$3/mmBtu on 1 July.

Prices shot 25pc higher in June as demand for low-cost gas trimmed storage injections and boosted demand from electricity generators. But the upward momentum has begun to fade.

Prices in June "rose by too much too fast," said Kyle Cooper, director of research for IAF Advisors. "We are still at all-time record inventory levels and we are still headed to all-time highs" by the end of the injection season, he noted.

US gas stockpiles have been in the spotlight this year after a mild winter tempered demand for the heating fuel and left inventories at record levels. Prices collapsed under the weight of those stockpiles, dropping to a 13-year low below \\$1.65/mmBtu in March and setting the stage for a sharp rebound heading into summer.

Low prices spurred electric utilities and grid operators to dispatch more gas-fired power instead of coal-fired generation. US stockpiles since the 1 April start of the injection season have increased by just 797 Bcf (22.6bn m?), 28pc smaller than the five-year average build.

But stockpiles have maintained record seasonal levels, which have exerted some downward pressure on prices.

Inventories rose last week to 3.277 Tcf — 17pc higher than a year earlier and 21pc above the five-year average, according to the US Energy Information Administration. That agency projects that inventories will enter the winter on 31 October at 4.022 Tcf, up by 13 Bcf from the record high reached on 20 November 2015.

In addition, the June rally led to gas surrendering some market share to coal in large consuming states like Texas. The rally may also boost gas output by encouraging some producers to put sidelined rigs back to work.

The US rig count, an indicator of the pace of gas and oil field development, has increased for seven of the last eight weeks, gaining 14pc since hitting a 2016 low in late May. The EIA said that the recent gas price gains could lead to higher production later this year.

Halliburton, the second-largest oil field services company, said it expects an increase in drilling this year on higher energy prices.

"Today our customers are thinking about growing their business again, rather than being focused on survival," chief executive Dave Lesar said last week during an earnings call.

In addition, Southwestern Energy, which ceased drilling late last year, is resuming operations, increasing its spending and raising its production guidance.

"We have already resumed drilling activities much faster than we anticipated," Southwestern chief executive Bill Way said last week.

Southwestern plans to add one to two rigs a month until its rig count reaches five by the end of the third quarter. The company will stay focused on the Marcellus shale, the largest US gas field by volume, adding two rigs each in the northeast and southwest portions of that field. It plans to add one rig to Arkansas' Fayetteville shale.