Prospects of Above-Normal US Temps Boost Nat-Gas Prices

Natural gas futures rose Tuesday, adding to Monday's gains, driven by forecasts of above-normal temperatures across much of the central and eastern U.S. from June 8-12, which is expected to increase demand for natural gas from electricity providers. Despite the price increase, lower-48 state dry gas production is up 1.7% year-over-year, and inventories remain above their 5-year seasonal average, suggesting adequate supply, while US electricity output fell -4.4% y/y.

Analysis

July Nymex natural gas futures (NGN25) registered a consecutive daily gain, closing +0.76% higher on Tuesday, primarily driven by forecasts of above-normal temperatures across the central and eastern U.S. for June 8-12, which is anticipated to increase cooling demand from electricity providers. Despite this short-term bullish catalyst, underlying market fundamentals present a mixed picture. U.S. dry gas production stood at 103.9 bcf/day, a 1.7% year-over-year increase, while current domestic gas demand was reported at 68.8 bcf/day, down 2.7% year-over-year. Further weighing on the demand side, U.S. electricity output for the week ending May 24 fell 4.4% year-over-year, although the 52-week cumulative output showed a 3.25% rise. LNG net flows to U.S. export terminals also saw a significant weekly decline of 12.9%. On the supply side, the EIA reported a +101 bcf inventory build for the week ending May 23, slightly above the 5-year average build of +98 bcf, pushing total inventories to 3.9% above their 5-year seasonal average, though still 11.7% below last year's levels. The number of active U.S. natural gas drilling rigs edged up by one to 99, remaining near multi-year lows but modestly above a recent 4-year low. In contrast, European gas storage levels at 49% full as of June 1, significantly below the 5-year average of 60%, could provide underlying support for export demand.

Key Decisions for Investors

• Investors should closely monitor near-term weather developments in the U.S. as they are the primary driver of current price volatility, while being cognizant of the prevailing supply overhang indicated by production levels and inventory surpluses compared to the 5-year average.
• It is prudent to track upcoming EIA storage reports and production figures to ascertain if the supply-demand balance shifts, particularly as cooling demand seasonally increases and LNG export flows show volatility.
• Consider the European natural gas storage deficit, currently at 49% full versus a 60% five-year average, as a potential factor that could tighten the global market and support U.S. LNG export demand, potentially counteracting some domestic bearish pressures.