Natural gas finishes the week at a two-and-a-half year high. Why the best may still be to come

Natural gas up another 4.5% today

A tight US storage report yesterday sent natural gas prices into overdrive, spiking 6% yesterday and another 4.5% today.

Prices at Henry Hub are at $4.37 per MMBtu, which was a pipedream a year ago when they were at $1.80.

For the Fed, this adds a complication to the inflation picture because as oil prices start to roll off from the CPI, higher natural gas costs will add to home heating and power costs.

The thing is, this might only be the beginning. European and Asian LNG markets are remarkably tight and trading 3-4x higher than US natural gas. In the UK, they hit a record high today.

Inventories in the US are tighter than the 5 year average but in Europe they’re at critical levels. There’s an incredible arbitrage in LNG so US plants are working as fast as they can. Pipeline exports to Mexico are also much higher than recent years.

US storage:

US natural gas inventories

What’s surprising is that drilling data in the past two weeks from Baker Hughes shows no pickup in the US. That may be a reflection of seasonality but there’s certainly money to be made in dry gas at the moment.

The real question is where it’s going next. The curve has prices above $4 through the heating season in March. If there’s a cold winter in North America, they could spike.

What could help the bulls in the nearer term is a seasonal pattern of strength in gas from Sept-Nov. September is the strongest month of the year, averaging a 8.52% over the past 20 years, followed by 6.65% in October with November third at +3.19%. Often we see a spike higher on the first signs of cold weather in the Northeast. Given the fundamental backdrop in global supply, this year could be especially interesting. There’s even talk of the US blocking LNG exports to keep domestic prices down — something that would cause a super-spike in the rest of the world.

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