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Why natural gas may be in store for more price gains after a 50% climb in July

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$30 natural-gas prices a possibility under certain conditions: analyst

Natural-gas futures bucked the trend of pullbacks in commodity prices this month and look to finish July with a 50% gain, the second largest monthly percentage rise on record.

Russia has been holding back natural-gas supplies in Europe, curbing the flow through the Nord Stream 1 pipeline, leading to a rally in the region’s prices and higher demand for liquefied natural gas from the U.S. Hotter-than-usual weather in many parts of the U.S. has also contributed to the rally for commodity, which is used as a power source to meet cooling demand.

Natural-gas futures NGU22, +1.87% NG00, +1.87% on the New York Mercantile Exchange are trading about 50% higher for the month of July, settling at $8.134 per million British thermal units on Thursday. European benchmark Dutch TTF gas futures, meanwhile, has seen a monthly climb of more than 36% to stand at 201.395 euros per megawatt-hour.

Jay Hatfield, chief executive officer at Infrastructure Capital Management, said natural-gas prices in Europe are trading around the equivalent of almost $60 per thousand cubic feet (mcf), which is over six times the U.S. price. Natural gas at $60 is also the energy equivalent of oil trading at $360 per barrel, he said.

This “astronomical price level” draws in incremental U.S. exports of not only liquefied natural gas, but also refined products, particularly distillate, as well as fertilizer, chemicals, metals and other manufactured goods that have a high energy/electricity input component, he said. The exports will lead to higher prices for all of these goods and raise demand for U.S. natural gas and electricity, he said.

The U.S. became the world’s biggest LNG exporter during the first half of this year, the Energy Information Administration reported, citing data from natural-gas information provider CEDIGAZ. U.S. LNG exports rose by 12% in the first six months of this year to average 11.2 billion cubic feet per day, with the EIA citing an increase export capacity, higher international natural-gas and LNG prices and increased global demand.

U.S. LNG exports are “running as hard as they can,” said Peter McNally, global sector lead for Industrials, Materials and Energy at Third Bridge. “Exporters are sending over every molecule they can to Europe” and longer term, Third Bridge experts see potential for European customers to sign long-term contracts with U.S. exporters.

Prices may still have room to run higher. “A few more 100+ degree days along the East Coast might push prices above prior peaks,” said Stewart Glickman, deputy research director at CFRA Research. It’s also possible for Russian President Vladimir Putin to reduce Nord Stream 1 gas flow down to zero instead of 20%, he said.

Meanwhile, Third Bridge experts see the possibility of natural-gas prices continuing higher for the next six to nine months, “mainly due to a very slow supply response,” said McNally.  Production is “likely to struggle to grow materially,” he said. The key will be the winter season, when U.S. inventories are likely to “peak at levels well below normal.”

“Our experts do have a scenario where, in case of extreme cold and high oil prices…natural gas prices could trade as high as $30.”

— Peter McNally, Third Bridge

Still, he said his company warned that the market could see some softness in the shoulder months of autumn before climbing higher with strong seasonal demand. “Our experts do have a scenario where, in case of extreme cold and high oil prices…natural gas prices could trade as high as $30…well above current prices,” which trade below $9 per million Btus.

That wouldn’t be a sustained price, but the “combination of regional shortages, little short-term availability and switching to alternative fuels could combine to make that happen,” said McNally.

The Atlantic hurricane season, which can disrupt energy production and transportation in the Gulf of Mexico region, is still active through Nov. 30.

But McNally believes that an impact on the Gulf Coast would be a “net negative” for natural gas. Over the last two decades, natural-gas supply from the Gulf of Mexico has “declined in importance as onshore production in Appalachia and West Texas has ramped higher,” he said. Also, should LNG export facilities be closed on the Gulf Coast, the natural gas used to feed those volumes would be seeking domestic markets — putting pressure on prices, all else equal.”

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