Mike Zaccardi, CFA, CMT

Prices fell last week as demand destruction concerns outweighed production losses. COVID-19 is the big driver of supply & demand factors right now, and last week traders were more focused on LNG export figures that are showing a steep drop. Domestic demand continues to run soft too, but there are signals that the economy may have in fact bottomed on a real-time basis in early April. While it is by no means a rosy environment for consumers, mobility trends and air traffic data suggests people are moving around more now. The upcoming holiday weekend will be interesting to see how much folks are willing to venture out. While some states have reopened for business, others are still on lockdown. Regardless of stay-at-home orders, people will only gradually begin to resume some normal activity. All of this matters to natural gas and oil prices as more economic activity obviously means more demand.

Turning to price-action last week, the market was steady in the $1.80s through Tuesday morning, consolidating declines from the multi-month high touched on May 5 at $2.162. Sellers resumed control during the day Tuesday, sending the June contract to the week’s low at $1.595 midday Wednesday, a 26% drop from the prior week’s peak. It was an all-time low print for the June 2020 delivery. A slightly bullish to expectations storage report on Thursday drew a price rebound to near $1.70 before a minor drop to the close on Friday. This morning, natural gas prices are higher by 6% to $1.75 as production losses are mounting. It appears exploration & production firms are cutting output at a much faster rate than first thought – and that is indicative in oil prices that are above $32 this morning ahead of Tuesday’s June contract expiration. Those expecting a repeat of negative prices into expiration have been in for a rude awakening today.

The natural gas forward curve fell slightly last week, but 12-month spreads (the price between June 2021 and June 2020) actually widened. January 2021 prices hit $3.208 earlier this month, but now trade just shy of $3. The back of the curve has generally trended down since last fall.

The weather picture is rather quiet this week and next as the market transitions from net heating degree days to cooling degree days. Above normal temperatures are expected for much of the CONUS through the end of the month. Weather model guidance trended warmer over the weekend, so we could see a little more cooling demand pop into the picture toward early June. The summer forecast calls for above average temperatures for nearly all of the country. The hurricane season officially begins on June 1, but we already have Tropical Storm Arthur offshore of the Outer Banks of North Carolina this morning. An active year is predicted with warm Atlantic Ocean sea surface temperatures and a La Nina pattern developing in the Pacific.

: WSJ reports that US benchmark oil prices are up 10% this morning to $32 and are on target for their highest closing price since March 11 as global economies reopen from coronavirus lockdowns, boosting oil and fuel demand. The front-month Nymex contract for June delivery expires Tuesday, and oil's continued march higher suggests fears of a storage shortage have abated and there won't be a repeat of last month's contract expiry when prices plunged into negative territory. "We've gone full 180 and rather than plunging to new depths, the rally is only gaining momentum," says Oanda's Craig Erlam.

: Last week, the EIA reported a build of 103 Bcf for the week-ending May 8. Consensus was +105 Bcf with a forecast range of 98 to 113. ICE futures trading had indicated an increase of 108 Bcf. The year-ago build was 100 Bcf and the 5-yr average was 85 Bcf. Storage is now 2.422 Tcf, 48% above a year ago and 20% above the 5-yr average.