Increased Cooling Demand Supports Natural Gas; Resistance Looming

Natural gas went against the trend of falling prices during June as hot and dry weather across the US saw increased demand from power plants due to people turning on their cooling devices. Natural gas futures have risen by a half since dropping to a multi-year low in April. The increased consumption by power plants and increased use of natural gas at the expense of coal has helped drive down the supply surplus which reached a six-year high at the end of March.

This has also helped alleviate some of the fears from earlier this year that the continued increase in the supply surplus could eventually lead to storage congestion in October and a potential collapse in prices. For the time being, weather developments and coal-to-gas switching hold the key to price performance over the US summer period. The hurricane season adds some additional focus, although the risk of these often devastating natural occurances hurting production has diminished over the last few years due to the offshore-onshore shift. (A great degree of natural gas production has moved from inland due to increased shale gas production.)

The recent rally however has increasingly put the switch from coal at risk as gas becomes less competitive to coal and thereby removes the economic advantage. A prolonged period of high electricity demand over the peak summer months of July and August with higher prices as a consequence carries the risk of backfiring once temperatures drop and demand slows. Speculative traders are currently holding 4 billion dollars worth of net long positions in Henry Hub natural gas futures and swaps and they will be keeping a close eye on the weather as support from switching will reduce as the price rises. The weekly storage data, normally released on Thursdays at 14:30 GMT will also be watched very closely in order to see whether the annual surplus continues to shrink. Due to US July 4 celebrations this weeks number will be delayed until Friday.

Technically near-term resistance at USD 3 on the August contract could slow down any further progress.