Natural Gas Market Update: Key Insights for July

Overview of Recent Price Movements

On Friday, July natural gas futures experienced a decline of 3.56%, closing at a lower price after reaching a near two-and-a-half-month high earlier in the week. This drop can be attributed to significant long liquidation pressures. As forecasts indicate a shift to more typical weather conditions throughout the United States starting next month, there is a potential decrease in demand for natural gas, particularly from electricity providers relying on it for air conditioning during peak summer months. Insights from the Commodity Weather Group suggest that the eastern two-thirds of the nation can expect mostly normal temperatures from June 30 to July 4.

Geopolitical Influences on Prices

Concerns surrounding geopolitical tensions, especially between Israel and Iran, are contributing to the volatility in natural gas prices. Any disruptions in the Strait of Hormuz, a critical passage for liquefied natural gas (LNG) shipments, could have widespread implications for global trade, given that this route accounts for approximately 20% of worldwide LNG transport.

Production and Demand Dynamics

As of Friday, natural gas production across the Lower 48 states was recorded at 106.7 billion cubic feet per day (bcf/day), marking a year-over-year increase of 3.3%. In contrast, gas demand for the same states stood at 69.8 bcf/day, showing a year-over-year decline of 11.3%. Notably, net flows of LNG to U.S. export terminals have seen an increase, averaging 13.8 bcf/day, which is a slight week-over-week rise.

Electricity Output Trends

A rise in electricity generation within the U.S. serves as a positive indicator for natural gas demand from utility companies. The Edison Electric Institute released data indicating that total electricity output in the week ending June 14 increased by 0.8% year-over-year, reaching 85,329 gigawatt-hours (GWh). Additionally, when observing a 52-week period ending on the same date, output was up by 2.9% year-over-year at 4,246,808 GWh.

Inventory Levels and Market Sentiment

The latest report from the Energy Information Administration (EIA) revealed mixed signals for the natural gas market. For the week ended June 13, inventories rose by 95 bcf, slightly lower than expectations but still well above the five-year average build for this time of year, which is generally around 72 bcf. Natural gas inventories are down 8% year-over-year but remain 6.1% above the five-year seasonal average, indicating a robust supply. In Europe, gas storage levels stood at 54% as of June 16, compared to a five-year average of 64% for this time of year.

Drilling Activity Insights

Baker Hughes reported a slight decrease in the number of active natural gas drilling rigs, which fell by two to a total of 111 rigs for the week ended June 20. This figure is just below the 15-month high of 114 rigs, reached earlier in June. Over the past nine months, the number of active gas rigs has climbed from a four-year low of 94 rigs recorded in September 2024.

Conclusion

The natural gas market remains in a state of flux, influenced by various factors including weather patterns, geopolitical dynamics, and changes in production and demand. Investors and stakeholders are closely monitoring these developments to gauge future price movements and market conditions.