Leaner Than Expected Storage Injection Rallies Natural Gas
At 10:30 AM EDT this morning the Energy Information Administration announced that only 36 bcf of natural gas was injected into storage for the week ending September 2nd, at the lower end of a range from 36-46 that most market analysts expected. This number came in below the 5-year average and most other metrics, as expected, though was still slightly larger than the injection for the same week in 2012, keeping stockpiles at record levels despite another lean injection.
Still, the lean injection helped October contract natural gas futures bounce off their 100-DMA in what looks to be quite a bullish move off support. Though prices were unable to overtake their 10-DMA, they did rally through a number of support levels. A close back below $2.78 late in the day could indicate that this is more of a oneoff rally from the data, though, with a number of key levels sitting in that $2.76-$2.78 range.
Meanwhile, we can feel confident in attributing much of the move today to the bullish EIA data. As of 2 PM, we noticed strong prompt month isolation, with the October contract up significantly more than any Winter or Spring 2017 contracts. The October contract was even up 2 cents more than the November contract.
The result is that the V/X short-term spread is back almost to the levels it was before prices began declining in the past week.
Still, it is worth noting the lackluster rally we have seen in the winter strip today. While the October contract has rallied more than 4% as of 2 PM, the winter strip is much less enthused by the EIA data.
This would seem to indicate that short-term supply concerns are easing, but that the data out today is not broadly shifting longer-term sentiment within the market. A combination of strong cash backwardation last week, slight production disruptions from Hermine, and impressive East Coast heat led to another very limited injection, but at least for now the market is not seeing that as evidence of any major supply/demand shift moving into the winter season.
This is not to discount the rally in the winter contracts either (the January 2017 contract has been up more than 2% since the data) but rather to explain why the October rally may be overdone, and why despite the bullish miss in data today the natural gas market should not necessarily be a buy. Throw in some cooler forecasts (the 6z GEFS below shows cooling demand likely falling off across much of the East next week) and upside may still be relatively limited here.
Of course, a number of factors remain in play, and moving through September weather plays less important a role as we see widespread "open window" weather across the United States. However, the attention of traders may begin shifting to October and November forecasts when heating demand arrives in force.
On Tuesday, we issued our Weekly Climate Update for clients, outlining the main threats to forecasts in each of those months, and we similarly published a blog that day on the likelihood that La Nina conditions decay in the coming months. Just today, the Climate Prediction Center announced that they were dropping the La Nina watch as it no longer looked likely to develop this winter. We will continue to follow the direct impacts to the winter forecast, which should have price implications for the natural gas market into the end of injection season.
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