Why scorching summer temperatures haven’t yet led to a lasting rally for natural gas

The market started off the summer cooling season with “a lot more gas in storage than normal,” following a very mild winter, said Gary Cunningham, director of market research at Tradition Energy. That helped to limit demand for refills into natural-gas storage and there’s “little urgency for U.S. utilities to stockpile gas for the coming winter.”

Prices for front-month August natural-gas futures trade 1.5% lower for the month, but that’s after a 5.9% rally on Thursday as hot weather forecasts looked to raise demand for the power source. U.S. weather forecasts call for above-normal temperatures across most of the nation over the next six to 10 days.

Natural gas had posted a gain of 26% in June to mark the biggest monthly rise since July 2022, according to Dow Jones Market Data. Year to date, prices are still down 38%.

“Yes, we have hotter weather potentially coming in the next two weeks, but power sector demand for gas remains manageable,” Cunningham said. That said, if there wasn’t such a sizeable surplus to the five-year average in storage, prices for natural gas would be at least 60 cents, and potentially as much as $1, higher, he said.

For the week ended July 14, working gas in storage stood at 2.971 trillion cubic feet, 575 billion cubic feet higher than a year ago, according to data from the Energy Information Administration released Thursday morning. 

This year’s decline is a far cry from the rally the market experienced just a year ago. Prices gained 52% for the month of July 2022, which was the second largest monthly percentage rise on record as Russia held back supplies to Europe and many parts of U.S. saw hotter-than-usual weather.

Weather

The U.S., Europe and Asia saw mild winter weather and limited gas consumption early this year — that limited liquefied natural-gas demand from Europe and Asia, said Cunningham.

That, in turn, led to several U.S. LNG export facilities undergoing prolonged maintenance outages and with those terminals offline, the amount of gas the U.S. is exporting is well below maximum, he said. That means more supplies have remained in the U.S.

Meanwhile, the Atlantic hurricane season is a factor in the outlook for natural gas, but maybe not as much as some expect.

Historically, the season has provided “volatility,” in the natural-gas market and this season, which runs from June 1 through Nov. 30, is expected to be very active soon because of extremely warm Gulf of Mexico water temperatures, said Beth Sewell, president and chief executive officer at Quantum Gas & Power Services.  

See: El Niño has potential to disrupt the outlook for sugar, rice and other consumer staples

However, Sewell does not expect to “see much more than a blip [in natural gas] since offshore production has declined over the years, leaving limited risk of disruption.”

Even if there was a hurricane disruption, it would probably be short lived since platforms can shut down and restart fairly quickly assuming no damage, after the storm passes, she said.

Supply

For Europe, Cunningham sees strong natural-gas storage levels coming into mid-summer, but also said winter is “still a risk for the continent.”

Even with normal winter weather, Europe’s storage “depletes quickly” and LNG is the principal method for refilling as they have lost some North African gas and the Groningen gas field in the Netherlands will reportedly shut later this year.

Over in the U.S., however, natural-gas production has remained “stubbornly high and has outpaced demand, which adds more to inventories,” said Stacey Morris, head of energy research with VettaFi. In the lower 48 states, working gas — the volume of gas available in the market — has been above the five-year average for “almost all of this year.”

For natural-gas prices to rise, “production needs to come down, while demand improves” — allowing inventories to come down, Morris said. European storage was at 55.7% full on March 31, which was a record high, Morris said.

The August contract for European benchmark Dutch TTF natural gas traded at 28.855 euros (US$32.10) per megawatt hour on Thursday. Prices traded at more than 300 euros in August of last year.

Continued hot weather could be “incrementally helpful for drawing down inventories and restoring balance in the market,” said Morris.

Outlook

Looking ahead, prices for natural gas for the rest of this year will “depend on production and demand — [and] demand often depends on the weather,” said Morris.

Tradition Energy’s Cunningham said that under one scenario, U.S. gas production could decline late this year, at the same time colder-than-normal winter weather moves into either the U.S. or the other key areas of the northern hemisphere, such as Asia, the Pacific Rim or the European Union.

That may cause U.S. LNG export terminals to “crank back up to maximum output,” he said, and lead to a “rapid increase” in U.S. natural-gas prices to well over $4, or even $5 per million British thermal units.

Bottom line, Cunningham said there’s a “strong upside potential in the natural-gas market, but weather will remain the key variable.”