High temperature expectations drive power generation demand, US natural gas futures hit the biggest intraday increase in more than two months

The Zhitong Finance App learned that US gas futures rose sharply on Monday, the biggest intraday increase in more than two months. The previous weather forecast showed a marked shift, indicating that the central and southern regions of the United States may experience hotter weather in the next few weeks. Coupled with a recovery in the flow of liquefied natural gas (LNG) export terminals along the Gulf Coast, it is driving up market expectations for natural gas demand. Meanwhile, funds that previously heavily shorted natural gas were forced to make up for short positions, further amplifying the price increase.

According to data from the private weather forecasting agency Commodity Weather Group, the US weather forecast will be significantly hotter in the next few weeks, especially in the central and southern regions. High temperatures usually drive electricity demand for air conditioning, thereby increasing fuel consumption in natural gas power plants and supporting natural gas prices.

Meanwhile, gas supply to the US Gulf Coast LNG export terminal rose to the highest level in more than a month, indicating that some facilities may be nearing completion of seasonal maintenance. The increase in LNG export terminal traffic meant a decrease in the supply of natural gas remaining in the US domestic market, which also further boosted prices.

Fund short positions have been at a high level for many years, and demand to make up has amplified the rise

The price increase also triggered massive short recovery. According to data from the US Commodity Futures Trading Commission (CFTC), as of last week, fund managers' net short positions on the US benchmark Henry Hub gas futures rose to the highest level since 2020.

At the same time, the fund only shorted positions, that is, the size of positions that simply bet on a further drop in natural gas prices, has also risen to the highest level since the media began tracking relevant data in 2013.

As gas prices rose early Monday, these funds had to make up some of their short positions to form additional purchases.

Market participants pointed out that when short positions in the natural gas market are too concentrated, once there is any beneficial change in fundamentals, it is often easy to trigger a rapid rebound.

Eli Rubin, senior energy analyst at EBW Analytics Group, said that there was also a serious oversupply in the US gas market in the spring of 2024, and speculators went short as a result. A subsequent round of short recovery of about 288,000 contracts pushed natural gas futures up close to $1 per million British thermal units.

In January of this year, there was a similar situation with US gas prices. At that time, the historic winter storm disrupted natural gas production and boosted demand. Combined with short compensation, futures prices rose 75% cumulatively in just three days.

The September contract rose 5.2%, and high inventories still limited upward space

On Monday, the price of US natural gas futures for September delivery rose 5.2% to 2.801 US dollars per million British thermal units, the biggest intraday increase since May 28.

However, current prices are still significantly below recent highs.

US domestic natural gas stocks are still above the historical average, and as new gas pipelines are put into operation this year, western Texas is expected to have more natural gas supplies entering the market.

As a result, although hot weather, a recovery in LNG exports, and a short-term rebound in natural gas prices are driving a short-term rebound in natural gas prices, abundant inventories and increased new supply may limit the room for further price increases.