With Summer Heat, Natural Gas Prices Could Get Reprieve After Crash To 25-Year Low
Investing.com | Jul 02, 2020 05:25
After cratering to their lowest in 25 years, natural gas prices are having their first winning week in five, thanks to progressively hotter summer weather that prompts Americans to crank up their air-conditioning, bringing hope to a market desperate to see demand improve, even as cases of COVID-19 surge.
“As the coronavirus continues to change global demand for oil and gas and the surrounding economics, producers are facing their reckoning,” Houston-based gas risk consultancy Gelber & Associates wrote in a July 1 note to its clients, a copy of which was seen by Investing.com.
“The weather forecasts are continuing to hold a warmer-than-average pattern that will nurture the seasonal upward crawl of gas-fired power generation."
“After forward prices reverted back to a price not seen for the last 25 years—in part due to the currently oversupplied global LNG market weighing heavily on demand for US gas exports—coal-to-gas fuel switching is pushing maximum levels even as seasonal generation requirements from both fuels rise."
Front-month Henry Hub gas futures were headed for a rise of nearly 14% on the week after a combined loss of more than 20% in four previous weeks. That would mark the biggest weekly rebound in natural gas prices in eight months.
The turnaround comes after the benchmark August contract registered a one-month high of $1.78 per million metric British thermal units in Wednesday’s session. It plunged to $1.44 per mmBtu last week, its lowest since August 1995, when the price hit $1.39.
“Power demand has weakened but still above trend, while production is rolling over again,” said Scott Shelton, energy futures broker at ICAP in Durham, North Carolina.
Higher power burns have possibly prompted the first decline in five weeks in gas storage numbers, which in turn has been reflected in the price action on the futures market.
Possible Pick-Up In Gas Demand/h2
Analysts tracked by Investing.com are betting on a net injection of 78 billion cubic feet for the week ended June 26, versus the previous week’s 120 bcf increase. The Energy Information Administration’s weekly report on US gas balances, due at 10:30 AM ET (14:30 GMT), will show how accurate those estimates are.
“Much warmer-than-normal temperatures are projected to engulf major parts of the US for the next several weeks,” Dominick Chirichella, director of risk and trading at the Energy Management Institute in New York, said.
Forecasts predict a “warm and muggy pattern” across the US North Central and Northeast, which is typical for summer, according to Chirichella's comments in a client note made available to Investing.com.
“Widespread above normal temperatures should occur across most of the North Central and Northeast US during the day 6-10 period.”
“The Upper Midwest through the Great Lakes will see the warmest anomalies. Highs will continue to be well into the 80s with 90s mixed in."
“The warmth will also be in place across the Four Corners Region into the southern Rockies. More seasonable weather is anticipated across the Northwest and areas near the Gulf Coast."
While one shouldn’t read too much into potential power burns this early into the summer, it’s a sign that the weather may have thrown natural gas a lifeline just as a resurgence of COVID-19 infections threaten to impose new lockdowns on the US economy.
Disclaimer: Barani Krishnan does not own or hold a position in the commodities or securities he writes about.
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