U.S. natural gas futures jumped to a 14-year high on Tuesday on forecasts for hotter weather and higher demand over the next two weeks than previously expected, worries about a slowdown in Russian gas flows to Europe, record coal prices and the coming expiration of the front-month contract.
That puts the contract on track to gain a record-setting 70% in July. The current all-time monthly percentage gain is 63% in September 2009.
“Fundamentally, scorching hot weather is the predominant bullish driver,” analysts at energy advisory EBW Analytics said, noting the risk of price “fireworks” was increased because liquidity was thin with the August front-month contract expiring on Wednesday.
Over the past year, EBW said the last two days of front-month contract trading averaged a gain of 41.3 cents per million British thermal units (mmBtu).
Extreme heat has already caused U.S. power demand to hit several all-time highs this summer in many states, including Texas, as homes and businesses crank up their air conditioners.
To keep those air conditioners humming, electric companies were burning more gas than usual due to the retirement of dozens of coal power plants in recent years and because coal prices were at record highs, making it uneconomic for many generators to switch on some of the coal plants that remain.
The spike in gas price came despite an increase in gas output to near record levels and the ongoing outage at the Freeport liquefied natural gas (LNG) export plant in Texas, which has left more gas in the United States for utilities to inject into low stockpiles.
Freeport, the second-biggest U.S. LNG export plant, was consuming about 2 billion cubic feet per day (bcfd) of gas before it shut on June 8. Freeport LNG estimated the facility will return to partial service in October. Some analysts say the outage could last longer.
On its second to last day as the front-month, gas futures for August delivery rose 47.2 cents, or 5.4%, to $9.199 per mmBtu at 11:12 a.m. EDT (1512 GMT), putting the contract on track for its highest close since hitting a near 14-year high of $9.322 in early June 2022.
Earlier in the session, the front-month hit its highest since July 24, 2008.
So far this year, the gas front-month is up 147% as much higher prices in Europe and Asia keep demand for U.S. LNG exports strong, especially since Russia’s invasion of Ukraine. The United States became the world’s top LNG exporter during the first half of 2022.
“The U.S. gas market has become international in recent years to the extent that overseas developments can spill quickly into the U.S. market and U.S. export activity could remain maxed out through next year,” analysts at Ritterbusch and Associates, a consultancy, said in a note.
Gas was trading around $55 per mmBtu in Europe and at $39 in Asia. That put European prices up about 13% on the expectation of cuts in gas flows from Russia via the Nord Stream 1 pipeline and prompted the European Union to curb gas use.
Russian gas exports on the three main lines into Germany – Nord Stream 1 (Russia-Germany), Yamal (Russia-Belarus-Poland-Germany) and the Russia-Ukraine-Slovakia-Czech Republic-Germany route have held near 3.8 bcfd since July 21 when Nord Stream exited a maintenance outage, up from around 1.4 bcfd for the 10 days the pipe was shut.
That was close to the 3.7 bcfd average during the month before Nord Stream shut but was still much lower than the 9.4 bcfd average in July 2021.
U.S. gas futures lag far behind global prices because the United States is the world’s top producer, with all the fuel it needs for domestic use, while capacity constraints limit LNG exports.
Data provider Refinitiv said average gas output in the U.S. Lower 48 states has risen to 96.1 bcfd so far in July from 95.3 bcfd in June. That compares with a monthly record high of 96.1 bcfd in December 2021.