[]Risks to U.S. production and an expected spike in demand have failed to rally prices for natural gas, which have dropped by nearly half so far this year.
[]The natural-gas market is reaching a historically pivotal phase of the year, with the price swings typically occurring in the summer and winter months, said Tyler Richey, co-editor at Sevens Report Research. Natural gas is the largest source of electricity in the U.S., at roughly 40%, so when temperatures heat up in the summertime, demand for power to run air conditioning units “rises in lockstep.”
[]Natural-gas futures started this year on a sour note, with prices dropping 40% in January to mark the largest monthly decline in more than two decades. The volatile trade for the commodity has left its front-month futures contract NG00, +1.00% NGM23, +0.86% down 48% year to date, with prices settling at $2.32 per million British thermal units on Tuesday.
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[]Natural gas is a “historically volatile commodity,” said Richey. That’s because speculators are “literally facing an impossible task” of predicting the weather.
[]“There are weather trends, climate cycles, and even ocean current factors (such as El Nino) that influence some traders’ decision making for long-term natural-gas demand expectations,” he said. At the end of the day, it’s very difficult to estimate temperatures beyond a week or so with the National Oceanic and Atmospheric Administration (NOAA) reporting a less than 50% accuracy rate for long-term forecasts beyond 10 days, he said.
Summer cooling
[]Expectations for natural-gas demand for this year’s summer cooling season run high. In its Short-term Energy Outlook report released in early May, the Energy Information Administration said it expects natural-gas demand to generate U.S. electricity this summer, from May to September, to reach its second-highest level on record, averaging 38 billion cubic feet per day.
[]Also see: Natural gas ‘hysteria’ cools, just as demand is expected to heat up
[]Still, there is uncertainty on the level of demand heading into this summer, said Chris Duncan, director of investments at Brandes Investment Partners, who pointed out that winter weather is still the much larger “swing factor” in natural-gas demand.
Atlantic storms
[]The Atlantic hurricane season, which officially begins on June 1 and runs through November, has also been a key weather-related factor for natural gas because it can impact offshore production of the fuel.
[]In April, hurricane researchers at Colorado State University predicted a slightly below-average 2023 Atlantic hurricane season. They predict 13 named storms, with six of those expected to become hurricanes, and two to reach major hurricane strength with sustained winds of 111 miles per hour or greater. NOAA is expected to release its hurricane season outlook on Thursday.
[]“Trying to anticipate the number or location of storms is as much of a gamble as looking beyond the 10-day temperature forecast any other time of the year,” said Sevens Report’s Richey.
[]“There’s a bit of a hurricane-premium built into the market in the early summer, with most of the bids flowing into contracts expiring late in the year,” he said. More than a third of the total U.S. natural-gas production occurs in Texas and Louisiana, so a major hurricane projected to make landfall in the region would be a “major bullish catalyst” for the natural-gas market.
[]Brandes’ Duncan, meanwhile, said onshore production in the Gulf of Mexico region is “less susceptible” to sustained impacts from hurricane damage. He believes that any impact from shut-ins from a hurricane would likely be “small and dissipate quickly.”
[]There’s also the “added complexity” of demand destruction from a hurricane as industry operations, such as refining and liquefied natural gas, are impacted and their consumption of natural gas is “impaired.”
Wildfire disruptions
[]The U.S. gets a lot of its oil and natural gas from Canada, and wildfires in western Canada, reportedly led some energy producers to curtail energy production this month.
[]Duncan said reports suggest shut-ins for natural-gas production peaked at around 2.5 billion cubic feet a day, but roughly 2 bcf per day has come back online this past week or so.
[]The situation is “fluid” and shut-ins could resume or get worse, but it’s not likely to have a significant impact on the U.S., “other than possibility specific regions and only for a short period of time,” he said.
Supplies
[]Risks to overall production remain, but the U.S. natural-gas market is currently “oversupplied” — and assuming typical weather patterns, the market will remain oversupplied, said Rodney Clayton, portfolio manager of the Virtus Duff & Phelps Select MLP and Energy Fund VLPIX, +0.28%.
[]Total working natural-gas supplies in storage stood at 2.24 trillion cubic feet as of the week ended May 12 —521 bcf higher than last year at this time and 340 bcf above the five-year average, according to EIA data.
[]For now, “we are witnessing a game of chicken between now and the start of winter,” said Clayton. “Either gas producers will voluntarily stop growing their output, or the market will force them to via a natural-gas price collapse.”
[]For the week ended May 12, oil-field services company Baker Hughes BKR, +0.11% reported a decline of 16 in the number of active U.S. rigs drilling for natural gas to 141, implying a drop in future output.
[]“The recent decline in the number of active gas rigs is a start, but we need to see much more before sounding the all clear,” Clayton said. “Expect a lot of price volatility in the meantime.”
