Despite the $0.68 setback from last week’s high, an injection to storage at the upper end of expectations last week, a slight narrowing of the EIA storage deficit to the 5-year average, and rising demand concerns, we think natural gas could be the strongest commodity market in the coming months. A slowing global economy will reduce demand, and more US supply is on its way, but a global rush to meet current demand requirements and fill strategic stockpiles (to avoid severe shortages and sky-high prices) should overwhelmingly favor the bull camp. The biggest limitations to expanding export demand for US natural gas are structural.
To alter the bull trend, it would probably require a massive downturn in the global economy or a cease fire in the Ukraine-Russia war (which we think is very unlikely). Given Russia’s indefensible attack and occupation of Ukraine, a halt to the gradually expanding embargo of Russian gas imports is unlikely. Therefore, consuming nations will be incentivized to build their strategic stockpiles. This will pull future demand into the present and result in a serious gap in demand in the future.
While the shift away from Russian gas has been in play since the invasion started, we think the reduction in purchases from Russia is just now starting to have a material impact on world supply. Last week Russia announced it was closing supply to Finland. Key pipeline supply flow under Ukraine is on one day and off the next. Every shunned billion cubic feet of Russian gas translates into increased demand for US and Middle East supply.
US structural export capacity constraints will limit growth in US exports, but that export strength has already limited the pace of seasonal rebuilding of supply in the US. Stockpiles are currently running 15% below the 5-year average for this time of year. July 2018 Natural Gas rose sharply from a May low at a time when the year over year deficit in EIA gas inventories was the widest in four years. And given the consistent growth in global gas and LNG consumption, the ability to rebuild US domestic supply will be limited.
With the most recent COT report showing a spec and fund net short of 63,406 contracts, the loss of Russian supply, a seasonal ramp up in cooling demand, and historic efforts to build global strategic stockpiles, we expect natural gas prices to march higher on heavy volatility.
Originally Published on May 20, 2022
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