15% Increase This Month
Heatwave and Cooling Demand as Future Price Factors
As the heatwave sweeping across the United States increases electricity demand, natural gas prices are rebounding. Although natural gas prices are still only about half of what they were a year ago, there are forecasts that they could rise significantly depending on the intensity of this year's heatwave.
On the 28th (local time), the July delivery futures price for natural gas on the New York Mercantile Exchange closed at $2.603 per million BTU (British Thermal Units). This is a 60% decrease compared to the same period last year, but it has risen about 15% since the beginning of this month. The surge in electricity demand was largely due to the heatwave exceeding 40 degrees Celsius spreading across the southern United States, including Texas.
Last winter, mild weather caused natural gas prices to fall significantly. Natural gas storage was also fully replenished. According to the U.S. Energy Information Administration (EIA), the current volume of stored gas is more than 15% higher than the five-year average for this time of year.
Experts predict that the current natural gas price, which is excessively low compared to its fair value, will be triggered to rise by the heatwave. If this summer's deadly heat continues and cooling demand expands, natural gas prices could increase sharply. Natural gas is a key power source, accounting for 41% of total electricity generation in the U.S., a higher share than coal and renewable energy combined.
Karl Chalupa, CEO of Gamma Investment Consulting, stated, "According to computer models considering fundamental factors such as inventory and weather patterns, natural gas prices are undervalued by 35-45% compared to their fair value. Gas prices are really cheap right now. We expect the situation to change and for gas prices to rise significantly."
There is also a possibility that gas companies will reduce natural gas supply. If natural gas prices remain excessively low and margins shrink, companies may cut production, which could lead to a future supply shortage and cause gas prices to rise again.
Recently, a survey conducted by the Federal Reserve Bank of Dallas targeting oil and gas company executives found that respondents expected natural gas prices to reach $2.97 per million BTU by the end of the year. This is significantly lower than the $5.64 forecasted in the March survey. If this happens, natural gas companies will reduce production to defend prices. In fact, U.S. EOG Resources announced that it would delay gas supply schedules as natural gas supply remains abundant and prices stay low.
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