Nat-Gas Prices Surge as US Weather Forecasts Turn Hotter

July Nymex natural gas futures surged 7.17% on Monday due to forecasts of warmer temperatures in mid-June across the central and eastern US, potentially increasing demand from electricity providers for air conditioning. While Lower-48 dry gas production was up 2.9% year-over-year at 104.5 bcf/day, and gas demand increased 3.8% year-over-year to 67.4 bcf/day, LNG net flows to US export terminals decreased 9.6% week-over-week. Despite a recent bearish EIA report showing natural gas inventories above the 5-year average, the weather outlook is driving near-term price gains.

Analysis

July Nymex natural gas futures (NGN25) experienced a significant rally, closing up +7.17% on Monday, primarily driven by forecasts from Atmospheric G2 indicating warmer temperatures across the central and eastern U.S. for June 12-16, which is anticipated to increase natural gas demand for power generation due to heightened air-conditioning usage. This demand expectation is supported by BNEF data showing Lower-48 state gas demand at 67.4 bcf/day (+3.8% y/y) and dry gas production at 104.5 bcf/day (+2.9% y/y) on Monday. However, countervailing factors include a 9.6% week-over-week decrease in LNG net flows to U.S. export terminals, which stood at 13.5 bcf/day. Furthermore, the Edison Electric Institute reported a 4.4% year-over-year decline in total U.S. (lower-48) electricity output for the week ended May 24, though the 52-week output remains up by 3.25% y/y. The most recent EIA report for the week ended May 23 was bearish, with natural gas inventories rising by 101 bcf, slightly above the 5-year average build of 98 bcf. As of May 23, inventories were 11.7% below year-ago levels but 3.9% above their 5-year seasonal average, suggesting adequate supply. European gas storage levels, at 47% full as of May 26, also lag the 5-year seasonal average of 58%. The Baker Hughes report indicated a marginal increase in active U.S. nat-gas drilling rigs by +1 to 99, which is still near the 4-year low and significantly below the peak observed in September 2022.

Key Decisions for Investors

• Investors should recognize the current natural gas price surge is predominantly weather-driven and may be short-lived if demand does not materialize as strongly as forecasted or if fundamental supply indicators remain robust.
• Monitor upcoming weather realizations, subsequent electricity demand figures, and weekly EIA storage reports closely to gauge the sustainability of higher prices against the backdrop of currently adequate inventory levels.
• Consider the potential for increased price volatility; a sustained period of higher prices could incentivize a more significant ramp-up in drilling activity, while ongoing weakness in LNG export flows could cap upside potential.