Nat-Gas Prices Rally on Middle East Conflict

Nymex natural gas futures rose 2.55% Friday, reversing a four-day losing streak, primarily due to a 6% surge in European gas prices following Israel's military action in Iran raising concerns about LNG shipment disruptions through the Strait of Hormuz and the temporary shutdown of Israel's Leviathan gas field. Forecasts of above-normal temperatures across the U.S. from June 23-27, expected to boost demand for air conditioning, also supported prices, despite U.S. gas inventories remaining above the 5-year average.

Analysis

July Nymex natural gas (NGN25) futures experienced a +2.55% increase, closing at +0.089 on Friday and breaking a four-day losing streak, primarily driven by external geopolitical events and supportive weather forecasts. A key factor was the +6% surge in European natural gas prices, a reaction to Israel's military actions in Iran which stoked concerns over potential disruptions to LNG shipments through the Strait of Hormuz—a critical passage for approximately 20% of global LNG trade—and the temporary curtailment of Israel's Leviathan gas field, impacting pipeline deliveries to Egypt. Concurrently, forecasts for above-normal temperatures across most of the US from June 23-27 are anticipated to bolster natural gas demand for power generation. However, these bullish elements are counterbalanced by several fundamental indicators: Lower-48 state dry gas production was reported at 105.4 bcf/day, a +3.2% year-over-year rise, while domestic gas demand fell to 70.3 bcf/day, a -5.2% year-over-year decrease. The EIA's weekly storage report indicated a +109 bcf build for the week ending June 6, surpassing expectations of +108 bcf and the 5-year average build of +87 bcf. This leaves US natural gas inventories -9.0% below year-ago levels but +5.4% above their 5-year seasonal average, suggesting sufficient near-term supply. US electricity output also declined -2.7% year-over-year for the week ended June 7, potentially reducing gas demand from utilities, though the 52-week output trend remains positive at +3.0% y/y. LNG net flows to US export terminals increased +1.3% week-over-week to 13.8 bcf/day. The Baker Hughes report showed a slight decrease of one active US natural gas rig to 113, though this follows a rise from a 4-year low in September 2024. European gas storage levels, at 52% full as of June 10, are currently below the 5-year seasonal average of 62%, providing some support to global prices.

Key Decisions for Investors

• Closely monitor geopolitical developments in the Middle East, as these are currently a primary driver of price volatility and could significantly impact LNG supply routes and European gas prices.
• Exercise caution due to conflicting market signals; while short-term catalysts such as geopolitical tensions and hot weather forecasts are bullish, ample US inventory levels (+5.4% above 5-year average) and rising domestic production (+3.2% y/y) may limit sustained price appreciation.
• Pay keen attention to upcoming US weather realizations and natural gas inventory reports, as deviations from current forecasts or inventory trends could swiftly alter market sentiment and price trajectories.
• Evaluate the interplay between lower European storage levels (52% vs 62% 5-year average), which could support global prices, against the backdrop of a recovering US rig count that, despite a minor weekly dip, suggests potential for ongoing robust US supply.