Natural-gas prices have dropped during the hottest summer ever, thanks to Europe

By Myra P. Saefong

Natural gas has become 'a more international fuel': analyst

Air conditioners are running at full tilt in many parts of the U.S. during what's expected to be the hottest summer on record, but the price of the natural gas used to help power them has dropped to its lowest level in three months. Consumers can, at least in part, thank Europe for that.

On its expiration day Monday, the August natural-gas futures contract settled at $1.907 per million British thermal units on the New York Mercantile Exchange, down a fifth consecutive session to end at the lowest level since April 26, according to Dow Jones Market Data.

The September contract (NG00) (NGU24), which is now the front month, edged up by 4.4% to settle Tuesday at $2.13. Based on the front month, prices have fallen 37.3% from this year's intraday high of $3.392 on Jan. 9, during the higher-demand winter heating season, according to Dow Jones Market Data. Prices have lost 15.4% year to date.

Natural gas has become "a more international fuel" given the ability to transport liquified natural gas, also known as LNG, around the world, said Beth Sewell, president and chief executive officer at Quantum Gas & Power Services.

"LNG shipments in Europe are down due to higher storage levels after last winter's non-event" - milder winter weather - "coupled with South and Southeast Asia's demand expected to start falling as monsoon season ramps up," she said.

Europe stocked up on supplies

European natural-gas storage levels finished the natural-gas supply-withdrawal season at the end of March at 58.72% full, or 3% higher than the prior year, Sewell told MarketWatch, citing data included in an article from the Financial Times.

Last winter was generally mild in Europe, and strong LNG imports and slow economic activity, along with the European Union's gas usage reduction targets, contributed to higher storage levels, she said, adding that demand for natural gas was about 20% lower in February than the 2019 to 2021 averages.

European LNG imports have declined, with Europe's imports tracking at 6.56 million tons for July, the lowest since September 2021 and down from 7.21 million in June, according to a report from Reuters citing data from Kpler.

All of that has helped keep more supplies in the U.S., even as the nation experienced its warmest year on record in 2023, and with temperatures tracking even higher this year to date, according to data from the National Oceanic and Atmospheric Administration's National Centers of Environmental Information.

Ample U.S. inventories

In the U.S., supplies have also been more than ample to meet consumer needs.

"There's plenty of gas in inventory, thanks in part to the warm winter we had," said Stacey Morris, head of energy research at VettaFi.

As of the week that ended July 19, domestic natural-gas inventories were 16% above the five-year average for this time of year, according to the Energy Information Administration. It pegged total working gas in storage at 3.231 trillion cubic feet, which is 249 billion cubic feet above the year-ago level.

Meanwhile, production in the Permian basin is increasing "rapidly," as oil prices remain elevated and natural gas is produced as a byproduct of drilling for oil, said Jay Hatfield, chief executive officer at Infrastructure Capital Advisors.

U.S. benchmark West Texas Intermediate crude oil for September delivery (CL.1) (CLU24) settled at $75.81 a barrel on Nymex Monday. That was the lowest front-month price since June 7, but it still trades 5.8% higher for the year.

Monthly Permian production is up 12% over the last 12 months, "despite lower natural-gas prices," Hatfield said. The Permian now makes up 26% of total gas production, versus 23% in the prior year, he said.

U.S. exports are also likely down in July, leading to more natural gas staying in the country to push prices down, because Hurricane Beryl, which made landfall earlier this month on the Texas coast, affected operations at Freeport LNG, the second-largest U.S. LNG export facility, Matt Smith, head U.S. analyst at Kpler, told MarketWatch.

The Atlantic hurricane season, which officially begins on June 1 and runs through Nov. 30, has historically fueled concerns over potential disruptions to energy production in the Gulf of Mexico.

However, more recently, hurricanes typically haven't been that supportive for natural-gas prices, VettaFi's Morris told MarketWatch.

That's because there's "relatively modest natural-gas production offshore relative to onshore" in the lower 48 states, she said. Power outages from lines damaged during hurricanes can lead to less natural-gas demand for power generation as well, she said.

Industrial power loads in the U.S., meanwhile, are "starting to slip" as the country's economy "endures continued inflation and a potential recession - meaning demand for goods will start to slip," reducing energy demand, Quantum Gas & Power's Sewell said.

Low price 'feels cheap'

Against this backdrop, the dip in natural-gas futures below the $2 per million Btu level may be low enough to entice some investors back into the market.

Usually, natural gas does bottom near the $2 level, said Infrastructure Capital Advisors' Hatfield, but the market is headed into the "shoulder months," the period after summer when weather is milder and demand is lower.

Morris warned that for the typical investor, playing natural gas can be "complicated, and even getting exposure through an [exchange-traded fund] like UNG is not straightforward."

The United States Natural Gas Fund UNG was trading down nearly 31% year to date in Tuesday dealings.

Hatfield said the "best opportunity to take advantage of the national gas surplus" is to invest in pipelines that transport natural gas for export and in the companies that own the liquefaction capacity. Investors can also buy individual companies or ETFs, such as Infrastructure Capital's InfraCap MLP ETF AMZA, that own shares of the largest natural-gas infrastructure companies, he said.

The companies that produce or export LNG include Cheniere Energy Inc. (LNG) and Chevron Corp. (CVX).

When natural gas has a "1-handle," said Morris, referring to prices under $2, "it feels cheap."

There is "arguably more upside risk to prices over the coming months than downside risk," she said, but natural-gas prices "could get worse before they get better."

In the near term, forecasts for cooler weather and bearish weekly storage reports could put further pressure on prices, Morris said. Some producers have curtailed production in response to low prices, and that is clearly a symptom of weak prices and a weak fundamental backdrop.

So if natural-gas inventories are high heading into the winter and production curtailments are reversed, it would be "difficult to see a lot of upside to prices, even if it's a cold winter," she said.

"The startup of LNG export facilities in 2025 should be supportive for prices," however, and the "consensus expectation is that natural-gas prices will be higher in 2025 than in 2024," Morris said.

-Myra P. Saefong

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07-30-24 1538ET

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