NYMEX August natural gas futures rally amid storage-driven short-squeeze

Buyers came out following the release of a bullish weekly natural gas storage report, which sent NYMEX August natural gas futures rallying 78.7 cents to settle at $6.297/MMBtu on July 7.

Roughly one month ago, NYMEX gas futures were trading in the $9.60s/MMBtu area and have since tumbled by a hefty 49% to lows in the $5.30s/MMBtu area earlier this week. Bullish gas market traders have been looking for anything remotely price-supportive as a reason to trigger a short-covering rally. Following the release of the weekly storage data by the Energy Information Administration for the week ended July 1, which showed a much smaller than projected 60 Bcf storage build, NYMEX gas futures soared. In the midst of a heavy-handed short-squeeze, gas futures prices vaulted to an intraday high of $6.381/MMBtu.

The data, which brings working gas in storage to 2,311 Bcf for the reflective storage week, was viewed as notably bullish as most market estimates were looking for an injection in the upper-60s/Bcf to low-70s/Bcf. According to the EIA data, inventories were 261 Bcf less than last year at this time and 322 Bcf below the five-year average of 2,633 Bcf. The smaller storage build could be attributed to tightening underlying supply/demand fundamentals stemming from rising LNG exports and wobbling dry gas production volumes that are being affected by maintenance operations.

However, the storage data may have been a bit sandbagged. Sandbagging means that some market players and analysts were purposefully setting their storage build estimates higher so that a potentially lower storage number would be construed as overly bullish relative to market expectations. It could also be that some market participants were projecting higher storage build estimates simply due to the recent chain of surprisingly larger-than-expected storage builds that have been published over the last few weeks. Early-bird market estimates for the next EIA storage report for the week ending July 8 are for a build in the neighborhood of 59 Bcf to 65 Bcf.

Weather outlook

Another component to the strength in NYMEX front-month gas futures is the 15-day outlook coming from the Global Forecast System and European weather models. The major weather forecast models suggest above-average temperatures will be on tap for most of the US for the next several days, which will include potentially record hot conditions in Texas, the largest gas-consuming state in the US.

However, a trough is slated to redevelop over the East, ushering in cooler temperatures to the eastern third of the nation by early next week. While this may be a short-lived cooldown to the Great Lakes and the Northeast, the models are forecasting those below-average temperatures will remain in place in the Southeast region of the US, and there may even be a hot weather reprieve in Texas toward the end of the week 2 (six- to 10-day) timeframe. Meanwhile, it should be noted that the major weather forecast models are also showing a threat of a prolonged heat wave in Europe, similar to the devastating 2003 heatwave. This hot temperature event is forecast to kick off in the days ahead and could remain anchored in place for weeks, which will likely continue to support elevated LNG export volumes leaving the US to Europe.