Natural Gas Roars Toward Record Monthly Gain on Searing US Heat

© Reuters. Natural Gas Roars Toward Record Monthly Gain on Searing US Heat

(Bloomberg) -- US natural gas futures are surging toward the biggest monthly gain on record, buoyed by scorching weather and the expiration of August options. 

Gas has jumped more than 70% in July. Though the outage at the Freeport export plant in Texas has stranded gas in the domestic market, the bulk of that supply has been burned for power to cool homes and businesses amid blistering temperatures. Gas demand for power generation has jumped by more than 10% this month from a year ago to record levels, according to BloombergNEF data.

Booming summer gas use and muted production growth from shale basins have left stockpiles of the fuel about 12% below normal, stoking concern about supply constraints in the colder months. The so-called widowmaker spread between gas delivered in March and April -- essentially a bet on how low inventories will be by the end of winter -- widened to the highest since 2006 for this time of year.

This summer is on pace to be the hottest in records going back to 1950 in the US, based on a measure of how the weather affects energy demand, according to Matt Rogers (NYSE:ROG), president of Commodity Weather Group LLC. 

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The rally is bringing August gas call options that were nearly worthless into play a day ahead of expiration, adding further momentum to the rally as sellers of the options are forced to cover short positions. With futures now trading near $9.20 per million British thermal units, there were still about 12,000 contracts of $8.90-$9.10 calls outstanding as of Monday’s close. More than 25,000 $10 calls are still open.

Some traders with bearish wagers are getting squeezed amid the price surge, said Dennis Kissler, senior vice president at Bok Financial (NASDAQ:BOKF) Securities. The outlook for hotter-than-normal weather and concerns about further cuts in Russian supply to Europe -- a major destination for US gas exports -- mean “no one wants to be short,” he said.

The jump in prices underscores how volatile the gas market has been this year, with extreme heat across the globe further straining stockpiles as the war in Ukraine disrupts supply. In Europe, gas prices climbed to the highest level in more than four months, as the region braces for a further reduction in Russian supply that could severely dent efforts to keep the lights on and homes warm this winter.

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