August Natural Gas futures soared this week to its highest level since the week-ending August 21, 2015. The catalyst behind the rally was a forecast for above average temperatures the next two weeks in most of the high demand areas of the U.S.
Early in the week, the market received a boost on concerns about a drop in production following an explosion at a processing plant. The explosion and fire occurred at a processing plant in Mississippi on Monday. According to S&P Global Platts, as much as 600 million cubic feet a day of output could be halted if it cannot be rerouted to another plant.
The rally gained traction mid-week after the release of a forecast that called for hot temperatures over the next two-weeks. This is expected to boost natural-gas demand.
I wrote last week that the current rise in natural gas demand was confounding some who expected a 40 percent rally in prices the past month would lead power plants to buy other fuels instead. This hasn’t happened yet, and as hotter weather has increased power demand, gas consumption grew about 1.5 percent month-to-date to nearly 67 billion cubic feet a day, according to Platts Analytics.
According to Genscape, Inc., a data provider, the higher natural gas prices have convinced some power generators to burn, coal, but gas consumption is still on the rise in the power sector. This has helped increase bullish sentiment in the gas market despite high stockpiles and production not far from record pace.
Image courtesy: Weather.com
With temperatures expected to remain high over the next two weeks, there is a lot of optimism in the market about a possible summertime rebalancing. With the forecasts also calling for a hotter-than-average summer, the bullish traders are buying in the hope that this high demand for gas-fired power will continue to soak up a glut of gas in storage.
Following a potentially bearish closing price reversal top on Wednesday, prices rebounded on Thursday after weekly inventory data showed that inventories grew less than expected last week.
According to the U.S. Energy Information Administration, producers added 42 billion cubic feet of natural gas to storage in the week ended June 24. This was less than the 48-bcf injections that analysts had expected.
If the strong weather-induced power demand continues and power generators continue to demand natural gas rather than other fuel alternatives, then the next two storage…