Dollar Weakness Spurs Short Covering in Nat-Gas Futures

Natural gas prices remain under pressure despite a modest daily gain, primarily due to near-record US production, with the EIA raising future output forecasts, and cooler late-summer weather forecasts dampening domestic demand. While robust LNG exports and a smaller-than-expected weekly inventory build provided some short-term support, overall US inventories remain above their five-year seasonal average, signaling ample supply and a challenging outlook for prices.

Analysis

The fundamental outlook for natural gas remains bearish, despite a minor daily price increase of +0.78% in the September Nymex contract, which was attributed to technical short covering. Significant supply-side pressure persists, with U.S. dry gas production running at a near-record 107.3 bcf/day, up 4.5% year-over-year, and the number of active gas rigs remaining near a two-year high. This supply glut is forecast to continue, as the EIA recently raised its U.S. production estimates for both 2025 (to 106.44 bcf/day) and 2026 (to 106.09 bcf/day). On the demand side, forecasts for cooler-than-normal temperatures in early September are expected to reduce air conditioning usage, a trend already reflected in the 10.7% year-over-year drop in lower-48 gas demand. While a smaller-than-expected weekly inventory build of +13 bcf provided some temporary support, overall U.S. inventories remain 5.8% above their five-year seasonal average, signaling adequate supply. Supportive factors, including robust LNG export flows (+8.2% w/w) and a yearly increase in electricity output (+7.1% y/y), are currently insufficient to offset the prevailing bearish domestic supply and demand dynamics.

Key Decisions for Investors

• Given the structural oversupply from near-record production and weak domestic demand forecasts, investors should consider the recent price uptick a technical short-covering rally rather than a fundamental shift, warranting a cautious to bearish stance on natural gas futures.
• Monitor weekly EIA storage reports closely; while the headline inventory level is bearish, another significantly smaller-than-expected build could trigger further short-term price volatility and present tactical trading opportunities.
• The combination of robust LNG export growth and below-average European gas storage (76% full vs. 84% five-year average) represents the primary bullish offset, and traders should watch for any signs that this export demand is accelerating enough to materially draw down domestic inventories.