The September 2020 natural gas futures price closed the session at $2.4170/MMBtu yesterday, Tuesday, August 18, 2020. This is the highest closing price since December 2019.
Back on August 7, 2020, we posted a blog about a sharp increase in natural gas prices. We believed at that time, that this was the start of a natural gas price rally. However due to these unprecedented times and the uncertainty these times have brought with them, we did not want to jump and make that call. As we have been receiving more data throughout this month, it does look like there is a definite upward rally in natural gas prices.
What factors are leading to the increase in natural gas prices?
- Weather – Nearly the entire US is expecting hotter-than-normal temperatures over the period of August 23, 2020 through August 31, 2020. This means an increase in cooling demand. This link will provide you with the 6 to 10 day temperature probability outlook from NOAA. Looking further into the future, there is now a 60% chance, which increased from a 50% to 55% chance last month, of a La Niña winter according to the NOAA. A La Niña winter would mean colder than normal temperatures and a greater chance for precipitation for New England, the upper Midwest and the state of New York. The southern portion of the U.S. would experience warm and dry conditions. Cooler-than-average surface waters in the central & eastern Pacific may develop into La Niña. The image below from climate.gov/enso provides a view of the difference from average sea surface temperatures at the equator in the tropical Pacific in July 2020.
- Natural Gas vs. Coal Usage – There is more natural gas than coal usage to generate electricity to meet the cooling demand. According to eia.gov, the above average temperatures and the low cost of natural gas are the drivers behind the US setting a record on Monday, July 27, 2020, for the most natural gas consumption by electric power plants of 46.7 BCF (billion cubic feet).
- LNG Demand / Exports – LNG demand continues to be strong and the LNG cancellations are dropping.
- Economy – On Tuesday, August 18, 2020, the S&P 500 Index and the Nasdaq Composite also closed at its first record since the coronavirus pandemic began.
We will continue to monitor the market and bring you updates as appropriate. We strongly recommend that if you need to hedge your natural gas, you should speak to your Energy Consultant about current natural gas prices and the outlook on future natural gas prices. If you don’t have an Energy Consultant, call our corporate office at 888-370-8898 to be connected to a Muirfield Energy Consultant.