Natural Gas Bulls Running Out of Steam ?
US Natural Gas has staged an impressive bullish rally, rising from $1.54 in June to around $2.7 currently , this is mostly caused by 2 mains factors, the main reason being that temperatures have been hot from June through to July. Typically warm temperatures cause natural gas prices to increase, this is because of increased Air conditioning use, in line with this electricity demand tends to increase as it is used to provide the power necessary to use the air conditioning systems.
The second reason is more of a long term factor known as the green energy transition, this is a worldwide incentive for countries to use more environmentally friendly sources of energy, natural gas can be used to generate energy and this can be used to replace other major greenhouse gas emission sources such as coal. For example an Oil refinery will typically use coal to generate power during the refinery and processing of oil, this can be substituted with natural gas. As a result there is a long term demand for Natural gas that will remain fairly solid.
So given this, why are bulls losing steam?
Well, although the long term outlook is certainly bullish, weather forecasts are showing much colder temperatures over the next two weeks or so in the US, as illustrated in the figure below.
Colder temperatures reduce the need for air conditioning thus leading to a reduction in demand which should translate into lower gas prices in the short term.
Additionally there is also the current situation with Hurricane Laura, a ‘deadly and damaging Category 4 Atlantic hurricane that tied the 1856 Last Island hurricane as the strongest hurricane to make landfall in the U.S state of Louisiana ever recorded’. The impact of the Hurricane has damaged consumption massively and seen a +40% impact on demand, with damaged units seeing a reduction of 25% in production capabilities. October 2020 sold off sharply, reaching $2.63 as market participants expected reduced LNG (liquefied Natural Gas) exports from US Gulf facilities.
Moreover ICIS reported that the 1/3rd of September consist of colder temperatures, further adding pressure to prices, we could potentially be seeing $2.5 relatively soon in the coming week as lagging demand becomes more apparent and temperatures cool. It has been reported that around 1.12 billion cubic feet/day of gas production has been closed along the US Gulf due to safety concerns surrounding hurricane Laura, this represents a whopping 41% of offshore US gulf natural gas production.
As mentioned right at the start of this analysis however, natural gas prices are still bullish long term, and they typically tend to rise again during the fall and heating demand picks up. The outlook for the next 2 weeks or so is tiled towards lower natural gas prices though once hurricane Laura subsides, ‘locked up’ production facilities along the US Gulf will re-open and the current 41% deficit in offshore US natural gas production, restored, hence supporting prices. In the short term we could see $2.5 followed by $2.9 , contingent on hurricane Laura ceasing to exist longer than the suggested periods mentioned above. Any developments here should be closely watched by traders and gas prices will be highly sensitive.