Natural Gas price surges the most in 33 months. What's behind it?

While the world yesterday was waiting for OPEC to announce its decision, which eventually turned out as expected with the production target remaining unchanged at 30 million barrel per day, natural gas leaped higher. The weekly US government storage data report surprised the market when it said that stockpiles only rose 67 billion cubic feet compared with an expected gain of 75 billion. The price of prompt natural gas jumped 14 percent, the biggest daily increase since September 10, 2009, to close just below USD 2.5 mbtu.

This could indicate that producers have finally begun to cut back on production amid very low prices. An increased amount of coal to gas switching has also reduced gas supply, and coal to gas switching has been profitable at current levels below USD 2.75 mbtu. The supply surplus, compared with the five year average, has now dropped to 29 percent from a peak of 61 percent at the end of March, and helps remove some of the concerns about storage capacity being exhausted at the end of this injection season.

A floor in the market now seems to have been established but whether this is the beginning of a rally that many investors have been looking for is still to early to say. It is generally believed that in order to continue to see the coal to gas switching, which has been a significant factor in reducing the surplus, the price needs to stay preferably below 2.5 and not higher than 2.75 until the end of the injection season. With the US summer comes an increased consumption of gas by electric generators as cooling demand increases. Just how the temperatures develops over the coming months compared with previous years will be an important driver for natural gas prices.

The annual hurricane season, which peaks during the third quarter used to be the one that had the ability to cause explosive price moves. With so much of the US gas production having moved inland from the Gulf of Mexico this now holds less sway over the market than previously. Therefore in the weeks ahead stay tuned on Thursdays at 14:30 for the weekly update on storage.