Big Summer Heat But Prices Still Mostly Low
Written by Catherine Elder
I have to admit some surprise that here near the end of August, natural gas prices have not bounced back up more – I really thought a hot July would do it. And we’ve had a hot July – multiple headlines pointed to this July being either the hottest on record or the hottest since 1880. Prices in certain regions have responded somewhat… but Henry Hub is still not much above that old $2 mark I told you all a few months ago makes me giggle. In fact, cooling degree days since May are 17 – 18% higher than for the same period in 2023 and also higher than normal.
EIA data only runs through July 9, but clearly shows gas-fired electric generation was higher in early July, and the prior months of 2024 look ever so slightly higher than the same months in 2023. So demand to fuel power plants seems higher (caveating that because the EIA data below is MWh of electricity, not Tcf of gas and there is some possibility more efficient gas units produced more electricity with less fuel – I doubt that happened, but it could have).
Source: U.S. Energy Information Administration
Storage inventory gives us the balance between supply and demand. In other words, the weekly injection or withdrawal instantaneously measures how the two compare. Injections cannot happen if supply is less than demand. Summer supply is usually higher than demand, allowing injection, and creating inventory that we will use in the winter, when supply is less than demand, as shown below.
Source: Aspen Environmental Group
So what we really want to know or watch is how the injections compare to what we thought should be available to inject. Storage injections did slow some in July. There was even one week in July though where the injection was negative – meaning we withdrew gas and indicating that supply was less than demand. But not by much: total inventory reported by EIA in mid-August is by no means inadequate – 3.264 Trillion Cubic Feet. That is about what it was a year ago and is fine for August. It clearly wasn’t enough to budge this market much.
In thinking about winter, we don’t yet have a full winter weather forecast. Back in early July, NOAA was saying 85% chance of La Niña conditions. The most recent advisory issued on August 8 says 74% chance of La Niña persisting through January. La Niña usually means below-normal temperatures through the northern tier of the U.S. south to the Ohio Valley, with above-normal temperatures in the South and Mid-Atlantic. For precipitation, the Pacific Northwest is wetter, the Pacific Southwest and South dryer. Where that polar jet stream cuts across US population centers is the key to La Niña’s impact on natural gas prices. NOAA has a great graphic here. (And for California, the “storm door,” that brings our Sierra snow and fills our reservoirs, tends to close.)
A final word, last month I provided some coaching on how to use forward prices. Some view the forwards as a price forecast. Don’t. I said they follow their own path. That’s because demand for the financial instrument is subject to difference forces – and additional forces – than the commodity itself. Prices for the instrument may go up with greater demand to lock in, like folks who just want or need a fixed price. I once even had a client who cared not what the price was, they just wanted it fixed. So forward prices do not represent where the market “thinks” prices are going to go so much as where the number of buyers and sellers looking to lock in prices settled. And the number of those on each side alone can affect price.