Natural Gas Futures Drop Even as Demand, and Temperatures, Soar

Most of the US has been slammed with temperatures that range from merely very high to outright dangerous, and for most of this week. The demand for electricity to run air conditioners is enormous, and therefore the demand for natural gas power generation is equally severe. It should be of some comfort to realize that natural gas production is able to step in and fill all that is needed quite easily. Or is this a fluke? First, let’s look at what the natural gas front month futures are.

Figure 1: The NYMEX front month natural gas futures, in USD per million BTU

The rapid increase in price up to 11 June is explained easily by the anticipated heat wave. The market is always overreacting to uncertainty, so the price shot up. Once the heat wave hit, and it was clear it could be handled smoothly, the price went back down. But how serious is this heat wave? This is supposed to be the hottest weather pattern for at least 45 years. NOAA sent out a message on X (formerly Twitter) with these warnings.

Figure 2: NOAA post to X about heat wave

Serious indeed. The New York Times also took NOAA data and produced a series of US maps for the week.

Notice that there are very few places in the US that aren’t under at least a caution on some day of the week. These show the incredible magnitude of the problem, and why it is easy to think that the price of natural gas futures ought to be skyrocketing as electricity needs increase for air conditioners.

Now, we look at the status of natural gas, so see whether it can actually take care of the situation. There are several factors to consider.

• The EIA report of natural gas in storage was the highest in the past 8 years for this time of year.

Figure 4: Natural gas in storage, in billion cubic feet

This is not an all-time high. The storage in 2016 was slightly higher. But it is a comfortable amount, even for this extreme heat.

• The Mountain Valley Pipeline became operational on June 14, 2024. It taps into the vast resources of the Marcellus and Utica Shale productions. This allowed up to 2 billion cubic feet of natural gas to be moved around.

• Production is rising overall, supplementing the abundant storage.

So, the ability to supply natural gas for heavy power generation is not in doubt. The ability of the infrastructure to deliver that much power is a topic for a different commentary, but summer air conditioning does not draw as intensely as heating in the winter, so that is not a concern right now.

So, what is the net effect on the price of natural gas going forward? Despite how much will be used for this heat wave, the consensus is that the price of natural gas will continue drifting lower, after a possible slight move up due to the current weather.