Nat-Gas Prices Turn Higher on Warmer US Weather Forecasts

June Nymex natural gas futures rose 2.49% on Friday, recovering from earlier losses driven by a larger-than-expected EIA inventory build of 120 bcf, which exceeded the 5-year average of 87 bcf. The rebound was fueled by forecasts of warmer weather across most of the US from May 28 to June 1, potentially increasing demand from electricity providers for air conditioning. Lower-48 state dry gas production was up 4.7% year-over-year, while demand increased 2.2% year-over-year.

Analysis

June Nymex natural gas futures (NGM25) experienced a 2.49% increase on Friday, closing up by +0.081, driven by short-covering after weather forecasts indicated warmer conditions for most of the U.S. from May 28 to June 1. This anticipated rise in temperatures is expected to boost natural gas demand from electricity providers due to increased air conditioning usage. The rally on Friday reversed an earlier slide caused by Thursday's Energy Information Administration (EIA) report, which detailed a weekly inventory build of +120 billion cubic feet (bcf) for the week ended May 16. This build surpassed both expectations of +119 bcf and the five-year average build of +87 bcf for this period. As of May 16, natural gas inventories were 12.7% lower year-over-year but stood 3.9% above their 5-year seasonal average, signaling adequate current supplies. On the supply side, Lower-48 state dry gas production on Friday was 107.0 bcf/day, a 4.7% year-over-year increase. However, Baker Hughes reported that active U.S. natural gas drilling rigs fell by 2 to 98 rigs in the week ending May 23, a level modestly above the cited 4-year low of 94 rigs (reportedly posted on September 6, 2024) and marking a continued decline from the 5-1/2 year high of 166 rigs in September 2022, hinting at potential future supply tightening. Demand indicators showed Lower-48 state gas demand at 70.5 bcf/day on Friday, up 2.2% year-over-year, while U.S. electricity output in the week ended May 17 rose 2.5% year-over-year. LNG net flows to U.S. export terminals were stable at 14.3 bcf/day (+0.2% w/w). Notably, European gas storage was 45% full as of May 20, considerably below the 5-year seasonal average of 56%, which could support sustained demand for U.S. LNG exports. The market exhibits conflicting signals: short-term bullishness from weather forecasts versus bearish pressure from high current inventory builds, juxtaposed with longer-term bullish potential from falling rig counts.

Key Decisions for Investors

• Monitor near-term weather forecasts closely, as anticipated warmer temperatures are a primary catalyst for current price support through increased cooling demand.
• Consider that while short-term sentiment is buoyed by weather, the EIA-reported natural gas inventories are 3.9% above the 5-year average, potentially capping significant price upside.
• Evaluate the persistent decline in active U.S. natural gas drilling rigs, now near a 4-year low, as a medium to long-term bullish factor that could constrain future supply and support prices.
• Factor in the European gas storage deficit (45% full vs. 56% 5-year average) as a potential source of sustained demand for U.S. LNG exports, which could influence domestic natural gas balances.