Nat-Gas Gives up Early Gains on the Outlook for Higher EIA Inventories

June Nymex natural gas futures declined on Wednesday, reversing some of Tuesday's gains, amid expectations of a larger-than-average build in EIA natural gas inventories (+119 bcf vs. 5-year average of +87 bcf). Despite warmer weather forecasts for late May potentially boosting demand, concerns over adequate supply, as indicated by inventories being 2.6% above the 5-year seasonal average, weighed on prices; lower-48 state dry gas production was up 4.4% y/y.

Analysis

June Nymex natural gas (NGM25) futures closed down by $0.314 on Wednesday, retracting a portion of the significant gains achieved on Tuesday. This decline was primarily attributed to long liquidation pressures driven by expectations that the upcoming EIA report will reveal a substantial inventory build of +119 bcf for the week ending May 16, markedly exceeding the five-year average increase of +87 bcf for this period. Although natural gas prices initially found support from forecasts predicting warmer weather in key regions like the Northeast, South, and West for May 26-30—conditions expected to elevate demand from electricity providers for air conditioning—concerns over supply adequacy ultimately prevailed. Supporting this, Lower-48 state dry gas production was reported at 105.5 bcf/day, up 4.4% year-over-year, while domestic gas demand was 67.5 bcf/day, a decrease of 3.8% year-over-year. Conversely, LNG net flows to U.S. export terminals rose 1.8% week-over-week to 14.8 bcf/day, and U.S. electricity output increased by 2.5% year-over-year for the week ending May 17. The market also digested the prior week's EIA data, which showed a +110 bcf inventory build, surpassing the 5-year average of +83 bcf. Consequently, as of May 9, natural gas inventories stood 2.6% above their 5-year seasonal average, indicating sufficient supply despite being 14.6% lower than the previous year. In Europe, gas storage was 45% full, below the 5-year average of 55%. The Baker Hughes report indicated a slight decrease in active U.S. natural gas drilling rigs to 100, which, while marginally above recent lows, remains significantly below the 2022 peak, potentially signaling a future moderation in production growth.

Key Decisions for Investors

• Investors should closely monitor the upcoming EIA natural gas inventory report, as a build aligning with or exceeding the +119 bcf consensus is likely to reinforce bearish sentiment in the short term.
• Evaluate the current supply landscape, where robust production (+4.4% y/y) and inventory levels (2.6% above 5-year average) may limit the upside from anticipated weather-driven demand spikes.
• Consider the trajectory of active drilling rigs, as the recent modest decline to 100 rigs, while not immediately impactful, could signal future production adjustments if the trend continues and affect longer-term supply dynamics.