Nat-Gas Prices Rebound as US Weather Forecasts Turn Hotter

Sep Nymex natural gas prices surged 4.42% on Tuesday, recovering from a three-month low, primarily driven by short covering on forecasts for hotter US weather in early August, which is expected to boost electricity demand for air conditioning. This rally was supported by a concurrent rise in European natural gas prices and increased US electricity output, despite recent bearish EIA inventory data showing US natural gas storage 16.4% above its five-year average and a declining US rig count.

Analysis

September Nymex natural gas futures (NGU24) experienced a significant intraday reversal, closing up 4.42% after hitting a three-month low. The rally was primarily technical, driven by fund short-covering in response to a Commodity Weather Group forecast for hotter-than-normal temperatures across the U.S. from August 4-8. This short-term bullish catalyst is supported by strong immediate demand signals, with Lower-48 state gas demand up 10.6% year-over-year and a 1.93% y/y increase in total U.S. electricity output for the week ending July 20. However, this weather-driven optimism is set against a fundamentally bearish backdrop of ample supply. The latest EIA report showed a larger-than-expected inventory build of +22 bcf, pushing total U.S. natural gas inventories to 16.4% above their 5-year seasonal average. Similarly, European gas storage stands at 84% full, well above its 5-year average of 75%. While the number of active U.S. gas rigs has declined to 101, near a multi-year low, current dry gas production remains robust at 103.4 bcf/day, a 2.8% year-over-year increase, indicating that supply has not yet tightened meaningfully.

Key Decisions for Investors

• Investors should weigh the short-term bullish catalyst of hot weather forecasts against the medium-term bearish pressure from exceptionally high inventories, which are currently 16.4% above the 5-year average.
• Monitor upcoming weekly EIA inventory reports closely to gauge whether the forecasted heatwave translates into sufficient demand to materially reduce the current supply surplus.
• Recognize that while the declining rig count is a long-term supportive factor for price, it is currently offset by robust year-over-year production growth, suggesting supply constraints are not imminent.
• Given the sharp, short-covering-driven rally, consider the risk of price pullbacks if weather forecasts moderate or if inventory data continues to reflect a well-supplied market.