In The Face Of Record Heat And Active Tropics, Why Natural Gas Prices Can't Rally

Europe’s benchmark natural gas prices surged on Tuesday mid-day in Amsterdam as the market is closely watching whether LNG exporters in Australia will manage to avert a workers’ strike that could cripple 10% of global LNG supply. So why can’t US natural gas (NYSEARCA:UNG) prices rally in the face of extreme global heat, lower U.S. rig counts, and several tropical storms in the Atlantic?

First of all, the record heat is not due to El Nino. In fact, history shows that El Nino results in normal to cool northern hemispheric temperatures over 70% of land masses. Believe in climate change or not, the record-warm oceans are unprecedented over tens of thousands of years. Think that places like Phoenix, Arizona, for example, which experienced 21 consecutive days above 110 degrees is normal, or forest fires from Greece to Canada are a normal cycle that is completely erroneous.

Anyway, much of Europe’s natural gas (BOIL) capacity is pretty adequate, as is the United States. Following panic buying last summer in the midst of the Russian-Ukraine war, a record-warm winter earlier this year has kept supplies high in Europe and the United States.

There is no panic by commercial users/producers that supplies of natural gas prices will run low.

Secondly, the incredibly wet, snowy western U.S. 2022 winter implies that hydropower demand is back online. Last summer, much of the West stepped up its natural gas usage, but not as much this season.

Next, all of these storms one sees in the Atlantic likely pose very little threat to U.S. production. Due to El Nino, wind shear in the Gulf tends to prevent any major hurricane. Nevertheless, ocean temperatures are at record-warm levels, so it is possible at least one strong hurricane will develop later this summer. However, really since Hurricane Katrina, the expansion of shale production and stronger infrastructure to the Gulf Coast natural gas facilities have meant that natural gas prices really see a sustained rally from hurricanes anymore.

In addition, notice the seasonal to be short natural gas in 12 of the last 15 years. The two arrows you see are periods in late August and September when short natural gas were losers.

Both 2019 and 2021 had a very warm late August and September, as my ClimatePredict weather software illustrates in my WeatherWealth newsletter. These two cases had a modest late summer and early Fall price rally. This could happen again this year.

Conclusion:

Any major bull market in natural gas (KOLD) is unlikely given adequate domestic and European supplies. The odds of an extremely cold winter are not warranted due to the record warm oceans (NOT!! a typical climate cycle) and also El Nino. Nevertheless, a potential warm September should keep natural gas prices from falling a lot further in the coming weeks.

Nevertheless, some companies such as Chesapeake Energy Corporation (CHK) continue to grow and could be longer-term good buy opportunities. The company has recently emerged from bankruptcy and plans to focus on natural gas production in the coming years. With the increasing demand for natural gas, Chesapeake Energy looks poised to grow and provide strong returns.