Natural Gas Forecast: Hot Weather Driving Prices Higher Despite Record Output

Highlights

• Natural gas prices rally on hot weather forecasts and increased output.
• Demand expected to rise as extreme heat boosts electricity usage in Texas.
• Speculators increase positions despite lower volatility.

Overview

Natural gas prices continued their rally on Tuesday, following a previous session of price increases. The opening of the new trading week saw higher prices, driven by forecasts of hot weather patterns in the United States from July 13-23. Weather systems affecting the Midwest and Northeast regions will still require the market to meet some seasonal demand in the coming days.

Weather Forecasts

The weather forecasts indicate that national demand for natural gas will increase later in the week. The East Coast is expected to warm up, with temperatures reaching the upper 80s to lower 90s, while California to Texas will experience impressive heat with highs ranging from the mid-90s to 100s.

The latest weather data suggests strong demand from July 16-23, as the northern US warms into the 80s and 90s, and the southern US remains hot with highs in the 90s and 100s.

Supply and Demand

Despite the price increase, natural gas drillers have been extracting near-record amounts of gas from the ground. The Electric Reliability Council of Texas (ERCOT) projects that electricity usage in Texas will reach new record highs due to extreme heat, leading to increased gas consumption for power generation. Gas-fired plants are the primary source of electricity in Texas, accounting for approximately 49% of the state’s power in 2022.

Specs Bump Up Net Long Positions

Speculators have increased their net long futures and options positions on gas, reaching their highest levels since June 2022 for three consecutive weeks. However, recent weeks have seen relatively small price movements, resulting in lower volatility. Historic or actual 30-day close-to-close futures volatility has dropped to its lowest level since April 2022. Despite this, historic volatility in February 2022 reached a record high, while in June 1991, it reached a record low. So far this year, historic volatility has averaged 85.6%.  This compares to a record high of 92.8% in 2022 and a five-year average of 57.9%.

Short-Term Forecast

Data provider Refinitiv reports that gas output in the US Lower 48 states has increased in July compared to June, and it is expected to surpass the monthly record high in May. Meteorologists predict that the weather will remain hotter than normal until at least July 25. Refinitiv also forecasts a rise in US gas demand, including exports, from this week to the next. Gas flows to major LNG export plants have increased in July. However, they are still below the monthly record due to ongoing maintenance at several facilities.

In summary, natural gas prices have risen due to forecasts of hot weather patterns, especially in Texas. Despite increased gas extraction, the expected rise in demand, both domestically and for export, has contributed to the price rally. Speculators have increased their positions, although recent weeks have seen lower volatility.

Technical Analysis

Natural Gas is showing a bullish trend, with the current price at 2.716, higher than the previous 4-Hour close of 2.682. The market is displaying positive momentum as the price remains above the 200-4H moving average (2.515), while in a position to overtake the 50-4H moving average (2.723). The 14-4H RSI at 54.73 indicates neutral but rising market sentiment.

The main support area lies between 2.508 and 2.576, while the main resistance area ranges from 2.811 to 2.880. With the current price above the main support level, the market is considered bullish. However, a confirmation of a breakout above the main resistance area is required for a stronger bullish outlook.