These moves are creating the illusion of a bear market rally, but in my opinion, there is still work to be done in creating an appropriate base to support a strong summer rally. While confirming a closing price reversal bottom and taking out a pair of minor tops could be signs of short-covering, the market still faces some serious headwinds at the 50-day moving average at $2.992 and the 50% level at $3.107. Until we can cross to the strong side of these indicators and establish a higher support base, I’m going to treat this rally as another shorting opportunity.
As we move closer to the summer cooling season, or if production softens or if storage doesn’t grow at a fast enough pace to reduce winter inventory heating concerns, I’ll put more emphasis on the long side of the market, but right now, I’m not fully committed to the long side. A solid “W” formation accompanied by a high volume breakout will convince me a major bottom has formed.
Production Is Finally Slipping
Output in the Lower 48 states averaged around 109.8 Bcf per day in April, down from March and below the winter peak. Early May data is pointing lower still, closer to 108.6 Bcf per day. High production has been the main reason this market stayed under pressure for as long as it did. Producers in West Texas are dealing with extremely low regional prices and some are cutting output as a result. The reduction is slow. It is not a collapse. But it is enough for traders to start asking different questions about forward supply.
Storage Is Still the Problem
Inventories are sitting about 7% above the five-year average and that surplus is the ceiling on any rally right now. The situation is improving at the edges. Injection estimates for early May are around 63 Bcf, well below last year’s 104 Bcf build and under the five-year average of 77 Bcf. Slower builds with lower production behind them is a different setup than what this market was dealing with two months ago. It is not bullish. It is less bearish and that is the distinction I keep coming back to.
LNG Is Doing the Heavy Lifting
Feed gas flows to export terminals have been running near record levels, averaging over 18 Bcf per day. That steady pull is removing excess supply from the domestic market and it is the strongest fundamental support this market has right now. There was a short-term dip from maintenance at some terminals but the overall export demand held. New capacity coming online at Corpus Christi keeps export demand elevated going forward. As long as LNG holds near current levels it puts a floor under prices that production alone cannot provide.
Weather and Demand Are Not the Story Yet
Below-normal temperatures across the eastern half of the United States through early May are adding some heating demand at the margin. Total demand is sitting near 106 Bcf per day. Power generation is around 33 Bcf per day. Industrial demand near 22 Bcf per day. Residential and commercial near 18 Bcf per day. None of those numbers are moving the market on their own. They are steady enough to support prices when supply is tightening but they are not the catalyst for a rally.
