- Deliveries to power producers a record for this time of year
- Worries about too much gas in storage are “receding slowly”
U.S. natural gas futures climbed to the highest level since September as unusually hot weather on the first day of summer drove up demand from power plants.
The Southwest will see record heat early this week while above-normal readings sweep most of the lower 48 states through June 29, according to MDA Weather Services. Gas deliveries to electricity producers Monday will be 34.3 billion cubic feet, the most for 2016 and for the time of year, PointLogic Energy data show. Government projections forecast power-plant demand for gas will be at an all-time high later this summer.
Gas futures have rebounded 71 percent from a 17-year intraday low in March, as a production frenzy started to slow and demand from generators jumped. Combined with unusually hot weather, this has steadily reduced a supply glut over the past two months, government data show. The high temperature in Los Angeles on Monday will be 105 degrees Fahrenheit (41 Celsius), 26 above normal, according to AccuWeather Inc.
“It’s summer, it’s hot and it’s trending,” said Jason Schenker, president of Prestige Economics LLC in Austin, Texas. “Hot summer weather is pushing the relative strength index to the levels not seen since the polar vortex in 2014. The market has worked itself up in a technical tizzy.”
Natural gas for July delivery gained 12.4 cents, or 4.7 percent, to $2.747 per million British thermal units on the New York Mercantile Exchange, the highest settlement since Sept. 14.
The price surge has been so great that it drove the relative price index, a momentum indicator, to the highest levels since January 2014. The 14-day RSI rose to 76.65 as of 2:31 p.m.. A reading above 70 is a signal that gas is overbought, which some traders may take as a sell signal.
The advance in gas prices, along with a rebound in oil futures, pushed up energy shares companies. Southwestern Energy Co. gained as much as 7.5 percent, while Chesapeake Energy Corp. gained 4 percent.
“We are going to see stronger demand and lower production levels; that’s why we continue to push higher,” said Gene McGillian, senior analyst at Tradition Energy in Stamford, Connecticut. “We still have an excess of supply on hand, but the dynamics are changing and that fear has been receding slowly that we have too much gas.”
The California Independent System Operator Inc. issued an alert asking customers in the southern part of the state to conserve on Monday to avoid power outages. The grid operator warned that gas supplies to generators in the area may be tight because of limited operations at the Aliso Canyon storage field, according to a notice Sunday.
The most intense heat in the Southwest will be in the early part of this week. Weather forecasts predict warmer temperatures for the East next week compared with earlier models, meaning a delayed return to seasonal readings, said MDA Weather Services.
Gas stockpiles probably rose by 54 billion cubic feet last week, based on the median of four analyst estimates compiled by Bloomberg. The five-year average gain for the period is 88 billion.
Inventories totaled 3.041 trillion cubic feet on June 10, 30.1 percent above the five-year average, according to the U.S. Energy Information Administration, which is scheduled to release its next supply report on June 23. The supply glut narrowed from 52.1 percent three months ago as storage injections came in below average in recent weeks.
“We should be worried if we get a long period of sustained heat in the next two months; there is a good chance we could push above $3,” McGillian said. The risk is that power generators may switch to coal if gas prices hold above $2.75 or producers decide to take advantage of the gains to connect drilled but uncompleted wells, he said. “If this is the case, production can ramp up and that would cut the rally short.”