Natural gas stocks on route to challenge capacity

Later today at 14:30 GMT, the weekly inventory report from the U.S. Energy Information Administration is expected to show a stock build last week of 84 billion cubic feet (bcf), just slightly below the five-year average for this week at 87 bcf. A build of this size will bring total gas in storage to 2.9 trillion cubic feet (tcf), some 18% above the five-year average. The charts below show the developments which have led to the current weak price action.

While consumption has been hurt by weaker industrial demand during the pandemic, production has  also suffered a setback due to the rapid reduction in U.S. shale oil production. Unfortunately a rising venue for demand, i.e. exports of LNG, has also seen a sharp reversal with lower gas prices across the world reducing the profitability of exporting LNG when taking the cost of transportation and liquefaction into account.

Just like WTI crude oil briefly collapsed into negative territory back in April when Cushing, the delivery hub was close to hitting capacity, the current trajectory of natural gas in storage highlights the challenge the market may face over the coming months. Following the seasonal path of stock builds, natural gas in storage is currently on route and at risk of hitting capacity before end October 2020 when the winter withdrawal season kicks in. The risk of forced production shut ins are likely to keep the price under pressure during the coming weeks, unless a prolonged heatwave arrives to lift demand for cooling.

One way to track the potential stress in the market is by following the spread between the October (NGV0) and November (NGX0) futures. The spread is pricing the transition from injection to withdrawal and currently it is trading at a very elevated -41 cents/MMBtu. A year ago the same spread for 2019 traded at -8 cents before expiring close to flat last September.