Nat-Gas Prices Edge Lower on Expectations for Inventories to Build

Natural gas futures declined to a 1.5-week low on Wednesday due to ample supplies and forecasts for inventory builds, with current inventories 4.7% above the 5-year seasonal average and expectations for a larger-than-average EIA inventory increase of +107 bcf. Limiting further losses were forecasts of hotter temperatures expected to move across the US from June 16-20, potentially increasing demand, though US electricity output fell -2.7% y/y, negatively impacting demand from utility providers.

Analysis

July Nymex natural gas (NGN25) futures experienced a decline of -0.026 (-0.74%) on Wednesday, settling at a 1.5-week low. This downward pressure is primarily attributed to abundant natural gas supplies and expectations of continued inventory accumulation. Currently, U.S. natural gas inventories are +4.7% above the 5-year seasonal average as of May 30, and the consensus for Thursday's EIA report is a substantial build of +107 bcf, which surpasses the five-year average increase of +87 bcf for this time of year. This follows last week's bearish EIA data showing a +122 bcf inventory rise. A limiting factor on further price drops is the forecast for significantly hotter temperatures across the U.S. from June 16-20, which is anticipated to increase demand from electricity providers for air conditioning. Conversely, U.S. electricity output for the week ended June 7 fell -2.7% year-over-year, potentially curbing gas demand from utilities, although lower-48 dry gas production stood at 104.5 bcf/day, a +3.4% year-over-year increase. LNG net flows to U.S. export terminals were 13.8 bcf/day, up +1.8% week-over-week. Adding to the supply outlook, Baker Hughes reported that active U.S. natural gas drilling rigs increased by +5 to a 15-month high of 114 rigs. Meanwhile, European gas storage was 51% full as of June 8, below the 5-year seasonal average of 62%, potentially supporting U.S. LNG export demand.

Key Decisions for Investors

• Investors should closely monitor Thursday's EIA natural gas inventory report, as a build at or above the forecasted +107 bcf could exert further downward pressure on prices given the current supply surplus.
• Consider the near-term impact of anticipated hotter weather on natural gas demand, which may offer temporary price support or short-term trading opportunities against the broader bearish supply backdrop.
• Evaluate the implications of the rising U.S. natural gas drilling rig count, as this suggests potential for sustained or increased future production, reinforcing a cautious outlook on longer-term prices.
• Monitor European gas storage levels and U.S. LNG export flow data, as a persistent deficit in European storage could sustain demand for U.S. LNG exports, providing some support to domestic prices.