Natural gas at 3½ month peak, but higher US gas stocks may challenge any sustained gains

Natural Gas

Volatility in the energy market has been high ever since crude set the historic sub-zero levels and natural gas has also been affected.

After days of consolidation in a broad range of $1.5-2/mmBtu, natural gas has risen over 7 percent to test a $2.15/mmBtu, the highest level since mid-January.

While some factors behind the gains are temporary in nature, natural gas has risen mostly in expectations of a tighter market in coming days.

Natural gas has risen amid expectations of higher heating demand as weather forecasts are pointing to a late-season cold snap in parts of US.

According to AccuWeather.com, an unusually chilly spring is about to turn even more shocking as cold air, moisture and a visit from the polar vortex team up to trigger way out-of-season conditions for mid-May across portions of the Northeast. The upcoming pattern is likely to bring snow that defies the norms for so late in the season and freezing conditions.

Natural gas prices have surged also on expectations that demand from commercial and industrial sectors may improve as more and more US states are easing virus-related restrictions. California became the latest state to announce that virus-related restrictions may be lifted this week. While the easing of restrictions bode well for the economy, market players may remain wary unless fresh infections are brought under control.

Also supporting price is expectations of lower US gas production as producers are cutting drilling and rig activity. The number of rigs drilling for natural gas has fallen to 81 rigs, lowest since 2016. As per Reuters reports, average gas output in the US Lower 48 states fell to 89.8 Billion cubic feet per day so far in May, down from an eight-month low of 92.8 Billion cubic feet per day in April and an all-time monthly high of 95.4 billion cubic feet per day in November.

A rebound in crude oil price has also helped natural gas. Crude oil has rebounded taking support from easing virus-related restrictions and deep production cuts by OPEC and other producers. If US shale producers are able to cut crude oil output it will also reduce the production of associated gas.

While near term outlook remains upbeat, higher US gas stocks may continue to challenge any sustained gains. US gas stocks stand at 2210 billion cubic feet which is 19.5 percent higher than 5-year average stocks for this time of the year.