Rising Heat & Shrinking Supplies: The Surge in US Natural Gas Prices

The Fundamental Analytics Team

US natural gas futures surpassed $3/MMBtu for the first time since the middle of November as updated weather forecasts pointed to hotter temperatures this summer that may lead to increased electricity demand. This demand surge is compounded by the cutting of drilling budgets and reduction of output earlier this year when prices hit record lows. The natural gas surplus from the warmer-than-usual winter has decreased significantly, from over 40% above the five-year average in March to 25% by the end of May, alleviating concerns about storage capacity.

Figure 1: LNG front month contract, EIA storage data (2019-2024)

Furthermore, the North American Electric Reliability Council’s annual report highlights elevated risks of energy shortages in Texas, New England, the Southwest, upper Midwest, British Columbia, and Saskatchewan if temperatures exceed expectations.

Nevertheless, LNG futures experienced increased volatility during last week’s sessions, after a federal report showed a weekly storage build. US utilities added 74 billion cubic feet (bcf) of gas into storage last week, broadly in line with expectations. The report also showed US gas stockpiles are 23.9% above their 5-year average. Meanwhile, the US Energy Information Administration revised its forecast, predicting a larger decline in natural gas production for 2024 than previously estimated, from 103.8 bcfd in 2023 to 102.1 bcfd. This decline is attributed to reduced drilling activity following a drop in gas prices. The EIA also raised its price forecast for 2024, expecting higher prices to encourage increased drilling and a subsequent rise in output.