Heat Wave, Russian Retaliation and Energy Turmoil in Europe Fuel Natural Gas Futures Rally


Natural gas futures climbed higher on Tuesday – after surging 80 cents over the two prior sessions – bolstered by sustained heat in the US South and West nearly, as well as deepening European supply distress amid the fallout of Russia’s war in Ukraine.

At A Glance:

  • Gazprom cuts gas shipments to Germany
  • US demand strong, driving up cash prices
  • Forecasts call for intense heat in August

The August Nymex gas futures contract gained 26.6 cents day/day and closed at $8.993/MMBtu. In early trading it surged past the $9.00 handle. September climbed 25.4 cents on the day to $8.825.

NGI’s Spot Gas National Avg. spiked 59.5 cents to $9.175 on Tuesday amid an ongoing heat wave and production challenges.

The August futures contract expires Wednesday. Typically thin liquidity heading into expiry often opens the door for big price swings. Prices did in fact seesaw violently Tuesday, but driven by domestic fundamentals and global supply challenges, futures ultimately forged higher Tuesday.

Russia again cut gas flows to Europe through the Nord Stream 1 pipeline this week — from 40% to only 20% of capacity. Russia’s state-owned Gazprom PJSC blamed equipment-delivery delays tied to Western sanctions imposed to protest the Kremlin’s invasion of Ukraine. However, the International Energy Agency, European government officials and analysts viewed the move as retaliation against sanctions.

Russia’s action amplified an already chaotic supply picture in Europe, hastened plans for rationing and put upward pressure on gas prices globally. European Union countries agreed Tuesday to scale back their natural gas consumption by 15% through next winter, citing the potential for Russia to cut off supplies entirely.

Asian prices also climbed early this week, as countries on that continent are now competing with Europe in the global market for LNG, including US liquefied natural gas. American exports of the super-chilled fuel topped 12 Bcf to start this week, according to NGI estimates, essentially maxing out current capacity.

“Escalating Russian aggression and LNG supply shortfalls…put the pressure back on international gas markets and sent prices in Europe and Asia back toward their winter highs,” RBN Energy LLC analyst Lindsay Schneider said Tuesday.

“The market has seen a perfect storm of weather events, high global demand, low renewable output in key regions and, of course, a war that has pitted the largest gas supplier to Europe against the Western world,” Schneider added.

Additionally, Ukraine’s natural gas transmission system operator warned Tuesday of potential damage to a transit route for moving Russian natural gas to Europe after detecting an unannounced change in pressure by Gazprom.

The collective blows to Europe come as it, along with the United States, is enduring a brutal heat wave. Rystad Energy analysts said overall European power demand was up about 3% during the first three weeks of July, compared to June, driven largely by cooling needs in countries such as Italy and Germany.

“The increase in demand could not have come at a worse time in Europe, since most of the additional power generation has to come from coal and gas, both in a severely constrained supply situation and very high prices,” Rystad analysts said.

Domestic Fundamentals

While the worst of July’s heat wave in the United States appears to have ebbed along with the arrival of seasonal temperatures in the Upper Midwest and Northeast, national cooling demand remains strong across the southern and western United States.

What’s more, heat is expected to intensify in August, driving elevated demand deep into the summer.

“Where the overnight weather data remained impressively hot and bullish is for the eight-to-15-day period as hot upper high pressure regains ground to rule most of the US with widespread highs of the 90s and 100s,” NatGasWeather said

Along with Europe’s challenges, “hot weather patterns, tight US supplies, and production failing to hold above 96 Bcf/day are primary contributors” to the Tuesday rally, the firm added.

US production fell below 96 Bcf on Tuesday, off more than 1 Bcf from summer highs that analysts said the market needs to sustain in order to meet demand and stow away supplies for the coming winter.

Wood Mackenzie analyst Laura Munder said Tuesday estimates showed a day/day output dip of 1.3 Bcf/d to 95.8 Bcf/d. “The declines are concentrated in Texas and North Louisiana,” Munder said. She noted short-term maintenance work in Texas.

Meanwhile, ahead of Thursday’s US Energy Information Administration (EIA) storage report covering the week ended July 22, preliminary results of a Bloomberg poll showed estimates ranging from increases of 15 Bcf to 28 Bcf, with a median of 22 Bcf.

[Want to know how global LNG demand impacts North American fundamentals? To find out, subscribe to LNG Insight.]

Even the high end of the estimates would compare bullishly with recent history. In the similar week last year, EIA printed an injection of 38 Bcf, while the five-year average injection is 32 Bcf.

EIA posted a 32 Bcf injection of gas into underground storage for the week ended July 15. The raised build working gas in storage to 2,401 Bcf. Still, stocks were 328 Bcf below the five-year average.

Spot Prices Surge

Physical prices on Tuesday held in lofty territory in the Southeast and continued to climb across other southern markets and throughout the West.

After a big gain Monday, Florida Gas Zone 3 forged even higher Tuesday, surging $1,260 day/day to average $14.955.

In Texas, El Paso Permian jumped 52.0 cents to $8.360 and Waha advanced 51.0 cents to $8.350.

Out West, SoCal Border Avg. rose 64.5 cents to $9.790.

National Weather Service (NWS) data showed rainy conditions and milder temperatures in the 70s and 80s tracking through the Upper Midwest, Ohio Valley and New England this week, softening national cooling demand modestly after an exceptionally bullish June and three-fourths of July.

Even so, highs in the 90s were forecast this week for most of the South and West, with 100s in parts of Texas, Nevada, Arizona and California.

In the Southwest on Tuesday, El Paso S. Mainline/N. Baja gained 53.0 cents to $9.705.

AccuWeather said searing heat also had infiltrated the Pacific Northwest this week, ending that region’s status as a rare Lower 48 island spared from lofty temperatures this summer.

“An area of ​​high pressure is set to expand across the Pacific Northwest through much of the week, which will make the dry and hot conditions the norm for many across the region,” AccuWeather meteorologists said in a report.

“Already, temperatures have reached sweltering levels in some of the Northwest’s major cities,” the firm added. In Portland, Oregon, for example, temperatures surged to 99 degrees on Monday, “coming only a single degree shy of the daily record high set in 1988.”

Hubs serving the Northwest posted strong gains Tuesday, with Malin up 52.5 cents to $8.925.

Looking ahead to the start of August, NWS forecasts called for scorching highs in the 90s on up for most of the Lower 48.

Maxar’s Weather Desk, meanwhile, observed “widespread aboves” in the temperature outlook for Aug. 5-9.

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