Hot Summer Weather Forecast Sends Natural Gas Prices Higher

Natural gas futures contracts for August delivery rose by 1.5% and settled at $2.69 per MMBtu (British thermal units in millions) on July 21, 2016. Prices rose due to the hot summer weather forecast and less-than-expected rise in natural gas inventories.

The United States Natural Gas ETF (UNG), which tracks natural gas futures, also rose by 1.3% to $7.93 on July 21, 2016.

The latest weather forecasting models suggest that temperatures will be hotter than normal between July 21 and July 27 in the central, southern, and eastern US. Cities like Chicago and New York will also experience extremely hot weather over the weekend. However, moderate temperatures should be experienced in the western and northwestern parts of the US next week.

Around 50% of US households use natural gas for heating and cooling. Hot summer weather drives the demand for gas-fired electricity generation to power air conditioning. The rise in demand impacts inventories. We’ll learn more about US natural gas inventories in the next part of this series.

Temperatures in the lower 48 states averaged 77 degrees for the week ending July 14, 2016. This is two degrees more than the temperatures for the week ending July 7, 2016. For the week ending July 14, 2016, temperatures were two degrees higher than normal—compared to the same period in 2015. The central and south Atlantic regions experienced hot weather for the week ending July 14, 2016.

US natural gas futures hit a 2016 high of $2.99 per MMBtu on July 1, 2016. NYMEX natural gas futures hit an all-time high of $13.50 per MMBtu in 2008. On July 21, 2016, prices are up by 13% YTD (year-to-date) due to expectations of a hot summer, short covering, and traders watching for possible impacts from La Niña.

On the other hand, natural gas prices hit a 17-year low of $1.64 on March 3, 2016, due to mild weather, weak demand, strong supplies, and high inventories. NYMEX natural gas futures were trading at $2.71 per MMBtu in electronic trading on July 22 at 6:40 AM EST.

The 52-week range for US natural gas prices is $1.99–$3.12 per MMBtu. Prices are down by ~13.4% over the last year.

Uncertainty in natural gas prices impacts natural gas producers such as Rex Energy (REXX), EXCO Resources (XCO), and Memorial Resources (MRD).

It also impacts funds such as the Direxion Daily Natural Gas Related Bull 3x Shares ETF (GASL), the VelocityShares 3x Inverse Natural Gas ETN (DGAZ), and the First Trust ISE-Revere Natural Gas ETF (FCG).

In this series, we’ll cover US natural gas inventories, the natural gas rig count, production, consumption, the US Commodity Futures Trading Commission’s “Commitments of Traders” report, and price forecasts.