US Natural Gas Is Taking Traders on a White-Knuckle Summer Ride

Jul 26, 2022

(Bloomberg) US natural gas prices are keeping traders on the edge of their seats this summer.Futures plunged almost 40% after an explosion knocked out a key export terminal in Texas last month, leaving supplies stranded in US shale basins. But prices have come roaring back just as quickly, heading for a record monthly gain in July as sweltering weather dents stockpiles of the power-plant fuel. Output from shale basins, meanwhile, isn’t rising fast enough to meet demand.

The rollercoaster twists and turns of the gas market show how sensitive traders are to supply disruptions and spikes in demand as the fuel becomes increasingly crucial to the economy in the US and abroad. More homes and businesses than ever rely on the fuel for heating and cooling. Before the blast at the Freeport liquefied natural gas terminal, the US was sending almost three-quarters of all its LNG to Europe, a region struggling to replace supplies cut off by Russia amid the war in Ukraine.

“That’s sort of a perfect storm here in terms of bullish inputs into this market, really making every molecule dear at this point,” said John Kilduff, founding partner at hedge fund Again Capital in New York.

US natural gas futures have soared about 70% in July after fully erasing losses from the Freeport LNG outage in June. Extreme heat is keeping air conditioners humming, boosting gas demand, while the expiration of the August futures and options contracts is also adding to the momentum as traders rush to cover bearish positions.

The June 8 blast at Freeport LNG took out about a fifth of US export capacity, keeping some supplies trapped in shale basins. But the US is still sending LNG abroad at a rapid clip as Russia strangles supplies to Europe amid the war in Ukraine, leaving global buyers to compete for scarce cargoes. US exports had risen earlier this year after Venture Global’s Calcasieu Pass export terminal in Louisiana started up.

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This summer is on pace to be the hottest in records going back to 1950 in the US, helping to keep gas prices elevated, according to Matt Rogers, president of Commodity Weather Group LLC. His estimate is based on cooling-degree days, a measure of how the weather affects energy demand.

Gas demand for power generation has averaged 43.4 billion cubic feet a day in July, about 10% above year-earlier levels.

As gas demand for power generation soars, less of the fuel is pumped into storage. US inventories are 12% below the five-year average for the time of year, stoking concern about supply constraints this winter. The so-called widowmaker spread between gas delivered in March and April — essentially a bet on how low inventories will be by the end of winter — widened to the highest since 2006 for this time of year, signaling a growing consensus that supplies will be tight.

Gas production from shale basins, meanwhile, is growing at only a measured pace. Drillers are under pressure from investors to keep a lid on capital spending, and while output is expanding as oil and gas prices soar, producers aren’t fully opening the taps yet.