Natural gas futures surged toward the significant $3 mark late last week, driven by weather forecasts predicting late June to be exceptionally hot. This rise occurred despite a bearish government inventory report, ending a two-week losing streak as bullish traders pushed prices higher. Last week, natural gas futures settled at $2.918, reflecting a notable increase of $0.331 or 12.79%.
According to NatGasWeather, although cooling demand in western regions was expected to decrease over the weekend, national demand is set to rebound in the third week of June due to widespread hot weather. Should this hotter-than-normal pattern persist, surpluses could decrease to approximately 450 Bcf. The National Weather Service (NWS) forecast temperatures ranging from the 50s to 90s across various regions over the weekend, with sustained heat in the Southwest and Texas.
The latest U.S. Energy Information Administration (EIA) inventory report indicated that utilities injected 98 Bcf into storage for the week ending May 31, slightly below the five-year average increase of 103 Bcf. This brought Lower 48 inventories to 2,893 Bcf, maintaining a surplus of 581 Bcf, or 25% above the historical average. Despite a historical bullish trend, the recent report marked the second consecutive bearish miss, indicating a week-over-week market loosening of 2.5 Bcf/d, though it remained tighter by 0.8 Bcf/d compared to the five-year average.
U.S. dry gas production has been declining since peaking at the end of 2023, averaging 102.6 Bcf/d in March 2024. Inflation-adjusted futures prices dropped to an average of $1.75 per million British thermal units in March 2024, the lowest in over three decades. Consequently, the number of active rigs has significantly decreased, with only 101 rigs in operation by May 2024. Without a price rebound, production is expected to remain flat, potentially rebalancing the market by winter 2024/25.
Liquefied natural gas (LNG) feed gas volumes have declined, partly due to maintenance at Cheniere Energy Inc.’s Sabine Pass LNG export terminal. However, Freeport LNG has shown signs of recovery. Regional price movements varied, with California prices falling and West Texas prices rising for the fourth straight session, driven by summer heat and reduced pipeline maintenance.
Considering the upcoming hot weather and its impact on demand, the natural gas market outlook remains bullish. Production constraints and strong summer combustion demand are likely to tighten supplies, supporting higher prices in the near term. Technically, the focus for bullish traders should be the potential resistance zone at $2.918 to $3.102.
This current bullish run is driven by forecasts predicting hot temperatures to continue through the end of the month. If the forecast shifts to less-hot conditions, it could prompt profit-taking. Conversely, extending the heat forecast into early July will likely accelerate the rally.
Diversified Energy Company plc (LON:DEC) is an independent energy company engaged in the production, marketing, transportation and retirement of primarily natural gas and natural gas liquids related to its U.S. onshore upstream and midstream assets.
