Nat-Gas Prices Underpinned by Shrinking US Inventories

October Nymex natural gas prices gained 1.80% Friday, reaching a 1.5-week high, primarily due to a smaller-than-anticipated EIA inventory build of 18 bcf versus a 27 bcf consensus, signaling tighter immediate supply. This upward movement occurred despite persistent bearish pressures from near-record US natural gas production, currently at 107.4 bcf/day, and upward revisions to EIA's 2025 and 2026 production forecasts, alongside expectations for cooler weather reducing demand.

Analysis

October Nymex natural gas futures (NGV25) experienced a short-term rally, closing up 1.80% to a 1.5-week high, primarily driven by a bullish weekly EIA report. The reported inventory build of +18 bcf for the week ended August 22 was significantly below the consensus of +27 bcf and the 5-year average of +38 bcf, signaling tighter immediate supply and pushing total US nat-gas supplies down 3.5% year-over-year. This price strength, however, is set against a backdrop of significant bearish fundamentals. US dry gas production is operating near a record high at 107.4 bcf/day (+3.8% y/y), and the EIA has increased its production forecasts for both 2025 and 2026. On the demand side, forecasts for cooler weather threaten to reduce consumption for air conditioning, while lower-48 state demand was already down 11.9% y/y. Although the number of active gas rigs fell slightly, it remains just below a 2-year high, supporting the high production thesis. While below-average European storage levels (77% full vs. 84% five-year average) and rising US electricity output (+7.7% y/y) offer some support, overall US inventories remain 5.0% above their 5-year seasonal average, indicating that the market is adequately supplied despite the recent smaller-than-expected build.

Key Decisions for Investors

• Investors should recognize the current price strength as likely being short-lived, driven by a temporary supply data surprise rather than a fundamental shift in the oversupplied market.
• Consider using the current rally as an opportunity to initiate or add to bearish positions, given the persistent headwinds from near-record production, upwardly revised output forecasts, and expectations of waning seasonal demand.
• Monitor upcoming weekly EIA inventory data and near-term weather forecasts closely, as a return to average or above-average inventory builds would likely erase recent gains and reaffirm the bearish outlook.
• Pay attention to LNG export flows and domestic demand figures, as sustained weakness in these areas would serve as a key confirmation of the prevailing oversupply thesis.