Natural-gas prices post their first monthly gain since October. Here's why.

By Myra P. Saefong

Prices for the fuel gained nearly 13% in April, paring their year-to-date loss

Natural-gas futures were among the largest commodity gainers in April - posting a monthly rise of almost 13% as traders bet on a slowdown in U.S. production ahead of the high-demand summer cooling season.

The "overarching climate trend points to hotter summers and warmer winters," and weather forecasts are "calling, unsurprisingly, for a summer full of heat waves," Pavel Molchanov, an analyst at Raymond James, told MarketWatch. As such, he said, it's intuitive that natural-gas prices are picking back up.

Natural gas for June delivery (NG00) (NGM24) climbed 5.6% on Monday but lost 3.9 cents, or 1.9%, on Tuesday to settle at $1.991 per million British thermal units on the New York Mercantile Exchange, or Nymex.

Based on front-month contract prices, natural gas gained 12.9% for the month and scored its first monthly rise in six months, according to Dow Jones Market Data. The rally has pared the fuel's year-to-date loss to about 20.8%.

After a mild winter, U.S. natural-gas inventories in storage are more than 30% above their five-year seasonal average, "signaling abundant supplies and downward pressure on pricing," said Ernie Miller, chief executive officer at Houston-based clean-energy-technology firm Verde Green Fuels.

The Energy Information Administration estimated natural-gas stocks in storage at 2.425 trillion cubic feet for the week that ended April 19, which is 655 billion cubic feet above the five-year average of 1.77 billion cubic feet.

That, however, is offset by the expectation that demand will increase this year while supply remains relative flat, Miller said.

Industry forecasts call for lower U.S. production in the second and third quarters of 2024 when compared with the first quarter, he noted. However, with strong storage inventories due to a mild winter, the U.S. will likely finish the domestic injection season for natural gas with a "good bit more gas in storage than the five-year average," he said.

Winter, or the months from November to March, is generally seen as the natural-gas supply-withdrawal season, while the summer months, from around April to October, represent the supply-injection season.

The supply-demand balance for natural gas is set to 'gradually tighten, as low gas prices tend to discourage new production while also incentivizing more demand.'Ernie Miller, Verde Green Fuels

Still, Miller expects the supply-demand balance for natural gas to "gradually tighten, as low gas prices tend to discourage new production while also incentivizing more demand," he said.

So-called associated natural-gas output from areas like the Permian Basin, located in West Texas and southeastern New Mexico, would work to slow the restoration in the supply-demand balance, Miller said.

U.S. natural gas is produced when drilling for oil, and the "returns on oil drilling continue to be very attractive," said Jay Hatfield, chief executive officer at Infrastructure Capital Advisors.

On Nymex, front-month prices for U.S. benchmark West Texas Intermediate crude (CL.1) (CLM24) settled 1.5% lower for the month of April but have still gained about 14.4% year to date.

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So far, natural-gas production has decreased slightly in response to low prices for the commodity, Hatfield said. For this year, he expects natural-gas production to be flat, compared with growth of 4% last year.

There is likely to be an ongoing surplus of natural gas in the U.S., particularly given that natural-gas output is associated with oil drilling, he said.

However, $2 prices are a "strong support level" for the commodity, as some marginal wells will be shut in at that price, Hatfield noted.

Upside from $2 will be dependent on a potentially hot summer and on normal winter weather, he said.

Raymond James's Molchanov, meanwhile, said he believes natural-gas prices have already marked a floor for the year.

Natural-gas futures saw a year-to-date intraday low of $1.481 per million British thermal units on March 26 - the lowest level since June 26, 2020.

Read: Natural-gas prices at lowest since 2020 on mild weather, ample supply 'double whammy'

Prices will likely be up in the summer and into the second half of 2024, said Molchanov, so Raymond James has a full-year forecast of $2.80 per thousand cubic feet, which is equal to about 1 million British thermal units.

"We are especially positive on the outlook for 2025, hence our forecast of $4.50 - much higher than the current futures strip," he said. Futures contracts for delivery in the early months of next year show prices below $4.

-Myra P. Saefong

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04-30-24 1533ET

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