Forecasts for Warm US Temps Boost Nat-Gas Prices

June Nymex natural gas futures rose 1.92% Tuesday, reversing earlier losses due to forecasts of above-normal temperatures in the lower 48 US states from June 4-9, potentially increasing demand for natural gas from electricity providers; however, gains were tempered by signs of abundant US natural gas supplies, as weekly EIA inventories rose by 120 bcf, exceeding the five-year average and placing inventories 3.9% above the seasonal average.

Analysis

June Nymex natural gas futures (NGM25) registered a 1.92% gain on Tuesday, closing up $0.064, driven by short-covering activity spurred by forecasts for above-normal temperatures across most of the lower 48 US states from June 4-9, which is anticipated to increase natural gas demand from electricity providers for air conditioning. This short-term bullish sentiment, supported by a 2.5% year-over-year increase in US electricity output for the week ended May 17, contended with significant headwinds from ample supply indicators. Specifically, the EIA reported a substantial +120 bcf rise in natural gas inventories for the week ended May 16, markedly above the five-year average build of +87 bcf for this period, pushing total inventories 3.9% above their five-year seasonal average (though still down 12.7% year-over-year). Further underscoring the robust supply backdrop, Lower-48 state dry gas production stood at 106.3 bcf/day, a 3.7% year-over-year increase, while LNG net flows to US export terminals declined 1.8% week-over-week to 14.7 bcf/day. Although the number of active US natural gas drilling rigs fell by two to 98 in the week ending May 23, a figure modestly above the 4-year low of 94 rigs (reportedly posted on September 6, 2024), this follows a significant decline from the 5-1/2 year high of 166 rigs in September 2022, hinting at potential future production moderation if this downtrend in drilling activity persists.

Key Decisions for Investors

• Investors should closely monitor near-term weather forecasts and their impact on cooling demand, as these are the primary short-term driver for natural gas prices, potentially creating trading opportunities on anticipated cooling demand increases.
• Remain cognizant of the substantial supply overhang indicated by inventories 3.9% above the 5-year average and robust year-over-year production growth of 3.7%, which are likely to cap significant price rallies unless there's a sustained shift in demand-supply dynamics.
• Keep a close watch on weekly EIA storage reports and LNG export flow data, as deviations from trends in these figures could signal shifts in the market balance and influence medium-term price direction for natural gas.