Looking to the Futures

The price of Henry Hub natural gas futures (/NG) found the lowest level since December last week. The current contract, set for August delivery, settled at $3.214 last Wednesday. Since then, it has rallied 10% to settle at 3.542 yesterday. Working gas in underground storage increased 1.5% last week to 3,052 billion cubic feet, 4.9% below last year but 6.2% higher than the five-year average.

Fundamental support for prices comes in part from demand for exports. The Energy Information Administration's Natural Gas Weekly Update reported pipeline receipts for LNG export terminals at 16.0 billion cubic feet per day(bcf/d) last week, an increase of 1% from the prior week. That represents about 82% of current capacity of 19.58 bcf/d, according to the Federal Energy Regulatory Commission (FERC). Looking ahead, LNG exports will likely provide an increasing amount of demand in coming years. FERC reports that export facilities with a further 17.85 bcf/d capacity are under construction, while approved projects that have not yet started construction will be able to ship another 17.2 bcf/d.

Warmer weather also gets part of the credit for the gains. While the average temperature this June was slightly cooler than last year (71.2F versus 71.8F) July has been hotter than normal. That trend is expected to continue. The National Weather Service Climate Prediction Center forecasts higher-than-normal temperatures for the entire Lower 48 except for the West Coast and Maine. The CPC has high confidence in hotter weather from Colorado to the East Coast over the next eight to fourteen days.

Hotter weather spurs demand for natural gas due to increased demand for electricity for air conditioning. The share of electricity generated from natural gas has been increasing in recent years, from 33% ten years ago to 43% last year. That is a greater share than the next two largest sources combined. Nuclear (18%) and renewables (24%) together make up 42% of the electricity mix.

While hot weather provides support for natural gas prices for air conditioning, cold temperatures obviously drive demand for heating. Demand for natural gas for heating increases in colder months. Over the last five years, average consumption in January was 111.6 bcf/d. As the country enjoys the goldilocks weather of May, consumption has averaged 71.6 bcf/d. With demand dropping by 36% from January to May, prices tend to drop too. Over the next three years, contracts for January delivery have an average price of $4.968, a 38% premium over the average May contract price of $3.591. This leads to an interesting setup for prices on natural gas. The Product Depth tool on thinkorswim provides a chart of prices on contracts for different months. For natural gas, it shows a sawtooth pattern with prices peaking in winter and dramatically falling off during injection season, including the widowmaker trade in spreads between March and April contracts. This pattern is in contrast to most other futures products which tend to show a relatively steady uptrend for products in contango or a downward slope for those in backwardation.

There has been a solid rally following last week's low. The recovery has taken the contract past the 9- and 20-day SMAs. If the rally continues, it could touch the 50-day for the first time since the end of June. The recovery has pushed the MACD back into positive territory, again for the first time since June. Similarly, the RSI is above the midline of 50 for the first time since June. Over the last two months it has been largely rangebound between $3.35 and $3.75.

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