Natural gas, once a leader in volatility, has more recently eschewed big price swings, in contrast to other markets, such as crude and equities. In fact, gas markets have been a bastion of stability in contrast to turbulent equities markets. These may not be unrelated.
Some market participants indicate that traders reduced gas market risk over the past few weeks, which allowed gas to watch from the sidelines. Thus, gas markets may have been stable simply because they were not traded actively during this renewed bout of macro market uncertainty. Forward volatility (options prices) reflects this more sedate world.Prompt month prices have danced around the $4/MMBtu level for most of August.
Whether the market believes $4 represents a soft price floor, as do we, remains to be seen,as the storage season progresses and as heat-stoked weather softens. Our view has been that the displacement of coal at the $4 level is large enough that the resultant gas demand boost eventually places a floor under gas prices. In addition, the long run of hot summer weather has been limiting storage injections to a level below what we had projected in weather-normal outlook. As a result, we now expect storage inventories to grow to 3.71 Tcf, below levels in both 2009 and 2010. This, too, should help support prices.
The prompt month contract was up 2% on the week, to $4.02, while 2012 prices rose just 1%, to $4.57.
Storage levels
In the lightest injection of the summer season so far, weekly storage grew an anaemic 25 Bcf,which finally reflected hot weather-induced consumption. The 38 Bcf build in the East, still troubling given power loads in that market, were more than offset by a 21 Bcf draw in the producing region. Storage now stands 202 Bcf behind last year’s pace. Factoring the warmerthan- normal weather forecast for the next two week’s, along with our expectation for supply growth, we now expect storage to reach 3.71 Tcf, well off the pace of 2009 and 2010. This represents the second time we have revised down our end-of-season inventory estimate, as hot summer weather has been incredibly persistent.
Supply and demand trends
The storage reports for weeks prior to last week came in above market consensus, worrying the market that either demand had fallen or that supply was surging. Against this backdrop, last week’s below-consensus storage number was comforting.
Yes, consensus missed again, but the miss was to the low side for a change. This single-handedly suggested that demand is intact. Indeed, surging consumption and fresh peaks in various eastern power markets must be boosting gas demand, but real-time numbers are difficult to gauge. Power loads remain elevated, even compared to weather-spurred 2010 levels.
The natural gas rig count climbed a stout 13 rigs on the week, to 896, marking the first week in some time that the rig count climbed above the 888 annual average (to date). We had expected a slow trickle lower, and yet the rig count has been rising more than falling recently. The rig count stands just 18 rigs shy of the level at the start of the year.
(Courtesy: Barclays Capital)
