Nat-Gas Prices Climb as US Weather Forecasts Turn Hotter

Natural gas futures rose nearly 3% on Friday, driven by forecasts of hotter weather in the US South and Northwest, which is expected to increase demand for natural gas from electricity providers. Despite the price increase, natural gas inventories remain 4.7% above the 5-year seasonal average, and the EIA reported a larger-than-expected inventory build for the week ending May 30, indicating adequate supply; however, the number of active US natural gas drilling rigs rose to a 15-month high, suggesting potential for increased production.

Analysis

July Nymex natural gas futures (NGN25) saw a notable increase of 2.91% on Friday, reaching a one-week high, primarily due to forecasts of hotter U.S. weather expected to elevate natural gas demand from electricity providers for air-conditioning. Despite this weather-driven rally, underlying market fundamentals present a mixed outlook. U.S. dry gas production stood at 106.1 bcf/day, up 4.6% year-over-year, contributing to robust supply. This is further evidenced by the EIA's weekly report, which was bearish, showing a natural gas inventory build of +122 bcf for the week ended May 30, surpassing expectations of +113 bcf and the 5-year average build of +98 bcf. Consequently, as of May 30, U.S. natural gas inventories were 4.7% above their 5-year seasonal average, indicating adequate supplies, although they remained 10.4% below year-ago levels. Current lower-48 state gas demand was reported at 72.4 bcf/day, a 1.0% decrease year-over-year, and a recent 1.8% year-over-year decline in U.S. electricity output for the week ended May 31 also suggests a temporary softening in utility demand, even as 52-week electricity output shows a 3.28% year-over-year increase. Potentially signaling increased future production, Baker Hughes reported that active U.S. natural gas drilling rigs rose by 5 to a 15-month high of 114. In contrast to the U.S. supply situation, European gas storage was 49% full as of June 2, below the 5-year seasonal average of 60%, which could influence LNG net flows to U.S. export terminals, currently at 13.6 bcf/day.

Key Decisions for Investors

• Investors should anticipate continued price volatility as the market balances short-term weather-driven demand against strong underlying supply indicators and rising drilling activity.
• Closely monitor upcoming U.S. weather forecasts and weekly EIA natural gas storage reports, as these will be critical short-term price catalysts, especially given current inventories are above the 5-year average.
• Consider the increase in active natural gas drilling rigs to a 15-month high as a potential cap on sustained price rallies, suggesting a well-supplied market outlook in the medium term unless significant demand shifts occur.