Weather & Storage Supportive

A spate of supportive storage data and weather forecasts have seen Natural Gas prices rallying strongly over the last week with the November contract printing fresh year to date highs of $3.098/MMbtu – 2018 calendar prices moved less aggressively to the topside. This has created a significantly backdated market with conditions their most extreme in over a year.

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Recent fundamentals encourage optimism for 2017 pricing though CFTC positioning data shows that produced hedging remains at strong levels and could benefit supply, ultimately capping upside for the price.

For now, bullish storage data continues to drive positive 2017 sentiment. Barring any significant weather disruptions, the recent 4-week trend suggests end season inventories in the lower 3.9 Tcf range, even with last week’s higher-than-expected EIA weekly storage data. This data not only represents a vast improvement from the early summer period but also indicates that winter storage will transpire to be less full in normal winter conditions.

Historic Heat Drives Prices Up

Ahead of the typically high-demand winter heating season, many are speculating that historic heat, which has seen record levels of demand for gas-fired power during a time of declining supply, will cause prices to continue to rise.

Alongside this dynamic, we are also seeing the power grid becoming more dependent on natural gas with the closing of more coal-fired power plants. Indeed, demand from the power sector is up over 10% year-on-year with Industrial demand having also increased for six straight months according to data from EIA.

With physical demand increasing alongside futures prices receiving a boost from the spot market which keeps trading higher than the futures, there is plenty of support for natural gas coming from all sectors.

Commercial Hedging Rising

However, E & P hedging is rising alongside market optimism which increases gas production estimates.Commercial hedging positions (short) have increased over 26,000 since the beginning of summer as the net positioning of managed money has added around 189,000 net long positions.  Looking at the CFTC positioning data for Natural gas shows a steady bullish increase in Non-Commercial positioning which turned net-long 4 weeks ago for the first time this year.

This means that the significant increase in market optimism over the last 5 months has allowed commercials to enter 2017 with even more advantageous hedging than they began 2016 with. Typically, these dynamic boosts supply resiliency as producers become less exposed to spot price and volatility.

Supply Constraints Ahead

Given the unique 2017 supply constraints, increased activity is likely to prove to be more bearish for 2018 prices. Pipeline constraints, particularly in the North East of the US, are likely to plague markets over 2017. This will limit producers’ ability to grow, regardless of price movement. For this reason, increased hedging in 2017 calendar prices offers a better 2H17 map for supply into what is anticipated to be an unprecedented level of supply-additive pipeline expansions in 2018.

Looking Ahead

A quiet data week which has seen very little volatility, today receives a boost with two key events over the US session. First, we have US Durable Goods Orders for August which are expected to drop down to -1.5% from the prior 4.4% reading. The US Durable Goods environment has been particularly choppy over the last year with orders struggling to forge any positive momentum.

Following this data, we then hear from Fed Chair Janet Yellen who testifies before the House Panel and will be heard for the first time since the September FOMC meeting.  Alongside these headline events today we also have comments from Fed’s Bullard, Evans and Mester who all speak today also as well as the latest update on US Crude Oil Inventories.