Commodities Analysis by Chris Yates covering: Natural Gas Futures. Read Chris Yates's latest article on Investing.com
The fundamental outlook for natural gas has improved dramatically in recent months. The drop in production has brought total supplies back to much more favorable levels.
Since mid-2022, the US natural gas market has faced continued bearish weather and robust production growth to such an extent the market exited the 2023/24 withdrawal season with storage levels around 650 bcf above seasonal averages. Prices dropped accordingly. As key spot benchmarks fell to lows around the $1.5-$1.6 MMbtu area, producers finally responded by cutting production in early March.
Total storage levels still remain ~600 bcf above seasonal norms. What’s more, my naive supply and demand model suggests if production were to average around 98-99 bcf/d from now until the end of injection season, storage levels will still be slightly above seasonal averages come withdrawal season. This of course depends on the weather from now until then , along with other factors such as the willingness of producers to bring back production.
However, there is potential for weather demand to surprise to the upside not only in the summer months but also throughout the 2024/25 winter months. Much of the bearish weather we have seen over the past 18 months can be attributed to El Nino. Both the Southern Oscillation Index and Oceanic Nino Index have been confirming the presence of El Nino since late 2022. Its presence in US winters historically results in warmer than usual weather. That is exactly what we have seen since late 2022.
First, it is important to note the futures term structure remains heavily in contango, with the key summer and winter months upwards of $0.5-$1.5 MMbtu higher than spot prices.
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