Natural Gas News: Prices Drop as Production Rises

James Hyerczyk
Updated: May 24, 2024, 13:26 GMT+00:00

Key Points:

  • Natural gas futures decline 9.75% from a four-month high as drillers increase production, despite lower-than-expected storage injections by the EIA.
  • Texas power demand sets a new record in May, driven by a heatwave, with expectations to rise further over the Memorial Day weekend.
  • Next-day power prices at Palo Verde and SP-15 remain negative, reflecting a recurring trend in 2024 across Texas, Arizona, and California.
Natural Gas News

In this article:

Natural Gas Prices Drop Sharply as Production Increases

U.S. natural gas futures experienced a significant decline for a second consecutive session on Friday, reflecting market adjustments after recent price spikes. This follows a peak in prices reached on Wednesday, the highest since January 17.

At 13:04 GMT, Natural Gas futures are trading $2.584, down $0.073 or -2.75%.

Production Response to High Prices

Natural gas futures fell by approximately 7% on Thursday, retreating from a four-month high. This decline was primarily attributed to indications that high prices have incentivized drillers to increase production. Despite the drop, a federal report revealed lower-than-expected gas storage injections. The U.S. Energy Information Administration (EIA) reported a 78 billion cubic feet (bcf) addition to storage for the week ending May 17, below the forecasted 85 bcf and the five-year average of 91 bcf. Nevertheless, storage levels remain 29% above the seasonal norm.

Texas Power Demand and Weather Impact

In Texas, power usage was on track to set a new record for May due to a heatwave, potentially escalating over the Memorial Day weekend. This surge in electricity demand is driven by increased air conditioning use. Concurrently, U.S. government forecasters have predicted an “extraordinary” 2024 Atlantic hurricane season, which could further influence energy demand and supply dynamics.

Negative Spot Market Prices

In the spot market, next-day power prices at the Palo Verde hub in Arizona and the South Path-15 in Southern California remained negative for a second day this week. Negative prices have been a recurring theme in 2024, especially in Texas, Arizona, and California. Palo Verde prices have averaged below zero 16 times this year, while SP-15 prices have hit negative territory 13 times, a stark contrast to previous years.

Supply and Demand Factors

According to financial firm LSEG, natural gas output in the Lower 48 states has averaged 97.4 bcf per day (bcfd) so far in May, down from April’s 98.2 bcfd and significantly below December 2023’s record of 105.5 bcfd. Daily production, however, has increased by about 0.9 bcfd since early May, as higher futures prices encouraged increased drilling. Despite this uptick, overall production is down around 8% in 2024 due to previous cutbacks by major producers like EQT and Chesapeake Energy.

Market Forecast

Looking ahead, the market is showing bearish signs as increased production may outpace demand, particularly with milder weather conditions expected in the northern U.S. However, high temperatures in the southern U.S. and potential disruptions from the hurricane season could add volatility. Gas demand is projected to ease from 92.5 bcfd this week to 91.6 bcfd next week, while LNG export flows have risen, which could offer some support to prices.

Given these factors, the natural gas market is likely to remain under pressure in the short-term.

Technical Analysis

Daily Natural Gas

Natural gas is dropping sharply on Friday after crossing to the bearish side of the 200-day moving average at $2.753, which is now resistance.

If the downside momentum continues to increase then look for a test of 50% of the recent rally at $2.380. This is followed by the major intermediate support or 50-day moving average at $2.205.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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