Commodities: Short-term price weakness hits natural gas market

By Ben Straus, U.S. Energy Services | August 26, 2015

Seasonal pressure is coming to bear on the natural gas market. Domestic consumption of natural gas is inextricably linked to weather patterns. The most influential is the use of gas for heating during winter months, but also relevant is the use of the fuel during the peak of summer cooling demand, when natural gas and coal are key commodities for fueling power generation demand for air conditioning. In between the winter and summer peak demand periods, natural gas prices tend to swoon, and it appears that as the peak of summer moves into the rearview, and winter snowflakes remain on the distant horizon, the natural gas market is positioned for short-term price weakness.

The broad context for natural gas prices throughout the summer has been a tension between robust year-over-year growth in domestic production and strong power generation demand driven by warmer than warmer than normal temperatures for June through August and attractive natural gas prices. The balance struck between demand and supply has put the market on a nice track to comfortable storage inventories ahead of the upcoming winter. With stocks of natural gas not too high and not too low, prices have remained tightly range-bound and remarkably stable since May. To a great degree, the warm weather has enabled this equilibrium in supply and demand for natural gas to remain in place. But, as the chart below indicates, demand will struggle to keep up as the calendar turns to September. Even with warmer than normal temperatures and low prices, power generation demand is set to decline from peaks above 35 billion cubic feet (Bcf) per day to less than 25 Bcf per day by the start of October.  Commensurate with this drop in demand, natural gas prices will face pressure to move lower, testing the lower end of the trading range for the year.