This week’s inventory report showed a below-average 47 BCF injection and total working natural gas in storage level of 3,308 BCF, about 12% above the five-year average. Even with rig counts declining and new well drilling slowing, production continues to grow as active wells are accessing new reserves through horizontal drilling. With the supply side indicators (growing inventory, record proven reserves, and constrained transportation capacity) no more bullish now than they were at the low close of $2.227 in the September contract on June 13th, we can determine that it has been the natural gas demand dictating price movements so far this summer. Production and inventory data did not surprise the market; it was the heat-related increase in power-generation demand that was not expected and drove the market above $3.200. Electricity producers had already started taking advantage of low prices to convert from coal to natural gas-fired generators before we experienced the hottest July on record, compounding the increase in demand. Now that a normal August comes to a close and we enter the shoulder months, weather anomalies affecting demand will continue to drive this market. If we have a warm fall we could see extraction season postponed which would put pressure on prices. In any case, looking forward it is going to take a harsh winter to clear up this inventory and support any kind of long-term rally because as prices rise more wells will come back online and new drilling will return to a normal pace. Good luck trading.
Statistics' Source: http://www.eia.gov
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