Simmering Supply Fears Trigger Natural Gas Futures Rally; Money follows suit

Supply adequacy fears amid continued signs of disappointing domestic production, amplified by lingering geopolitical worries, helped natural gas bulls confidently rally futures above the psychological threshold of $6.00 on Tuesday.

In short :

  • Early-cycle pipeline nominations show falling production, fueling supply fears
  • Bullish Sentiment Continues on “Same General Narrative”
  • Analysis shows that E&P sticks to maintenance spending

Spot prices followed higher futures, with the NGI Spot Gas National Avg. advancing 30.5 cents on the day to end at $5.785/MMBtu.

May Nymex futures climbed 32.0 cents to settle at $6.032 on Tuesday, with the market showing little of the concern that saw prices stagnate a day earlier.

At Tuesday’s settlement, the May contract was poised to breach the upper boundary of a key resistance band at $5.839-5.912-6.020-6.032 pegged by ICAP technical analysis.

Breaking that resistance band would place the next upside target at $6.466, ICAP analyst Brian LaRose told clients.

The bullish sentiment on Tuesday stemmed from the “same general narrative of the past few weeks,” according to NatGasWeather.

A persistent storage shortfall relative to the five-year average, which is expected to persist “for the foreseeable future,” contributes to a “relatively bullish background,” the company said. Traders on Tuesday also appeared to be factoring in expectations of a warmer-than-normal summer, as well as high inflation and lingering geopolitical tensions from the war in Ukraine, NatGasWeather added.

“It’s unclear how far natural gas prices are going or if sellers will step in soon, but we continue to caution that natural gas prices tend to rise more than many realize, suggesting that ‘there might still be room,’ said NatGasWeather. “In our view, production would need to increase by at least 2 to 3 billion cubic feet per day to provide bear forage to counter the relatively tight supply from the United States.”

O production, where are you?

Natural gas futures got underway Tuesday morning as updated pipeline throughput data showed a notable drop in domestic production, according to EBW Analytics Group senior analyst Eli Rubin.

“Dry gas production has increased significantly over the past three weeks, but pipeline flow controllers are swinging wildly in early April flow estimates,” Rubin said. “While any downside may disappear with the end-of-cycle revisions, an early-cycle loss” of around 1.5 Gcf/d day/day has added momentum to early futures.

Those hoping that recent market signals will prompt a major shift by producers to ease upward pressure on prices may end up disappointed, at least for now.

Despite soaring commodity prices, exploration and production (E&P) companies appear to be sticking to their current maintenance-level investment strategy, according to an analysis by RBN Energy LLC. The more than 40 E&Ps tracked by the company have presented plans in 2022 to increase capital expenditure by 23% and increase production by 8%.

However, “actual gains will be significantly lower,” according to RBN analyst Nick Cacchione.

E&P companies face a “myriad of challenges” in ramping up production, Cacchione said. These include inflation; labor and material shortages; high energy costs; environmental, social and governance factors; and investor pressure to prioritize cash flow generation over production growth.

Looking specifically at gas-weighted E&Ps tracked by RBN, operators forecast a 32% increase in capital spending to $8.8 billion this year.

“This level of capital investment is still one-third below the 2018 peak and 56% below 2014,” Cacchione said.

This gas-weighted E&P is expected to boost oil and gas production by 10% to 1.7 billion boe this year, reflecting projected increases among six companies out of a peer group of 11 companies. Three others are expected to keep production stable and two anticipate a drop in production, according to RBN estimates.

“The acquisitions are driving the increase in investment and production in the gas-weighted group,” Cacchione said.

All in all, it’s tempting to think that “E&Ps may be moving away from their conservative investment strategies” given rising commodity prices. However, upon closer examination, “it becomes clear that much of the increase in capital expenditure reflects cost inflation, and part of the remainder is related to either the rebuilding of inventories of drilled but uncompleted wells , or the development of newly acquired assets,” Cacchione said.

After factoring in the acquired assets, the outlook for production growth among E&P RBN tracks becomes “significantly less optimistic,” the analyst added.

Upward trend in cash rides

Physical prices appeared to take inspiration from the bullish movement in the futures market, with broad-based gains of around 30 cents in the shoulder season. Spot price trends generally mirrored the day ahead Henry Hub rally, where prices rose 30.0 cents to $5.955 in Tuesday trading.

A number of Rocky Mountain locations, meanwhile, posted somewhat higher day-to-day gains ahead of the cooler temperatures expected to arrive within six to ten days. From Sunday to early next week, the Maxar weather office was forecasting cooler conditions west of the Lower 48.

The period will bring a shift in trend “as short-term warmth in the southwest gives way to cooler themes,” the forecaster said. “It comes as a trough deepens over the region, bringing a cycle of temperatures well below normal.”

Burbank, Calif., was on track to see triple-digit highs on day four give way to highs in the 60s on days seven through nine, according to Maxar.

“The forecast is further cooler from the Rocky Mountains to the north-central as the trough expands eastward in the later stages,” the forecaster said.

Cheyenne Hub rallied 37.0 cents to $5.695 on Tuesday, while Opal jumped 37.5 cents to $5.750.

Meanwhile, in West Texas, negative basis differentials widened on the day, with gains lagging much of the rest of the bottom 48. Waha added 17.0 cents to an average of $5.345, while El Paso Permian climbed 14.0 cents to $5.330.

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