US natural gas prices surge above $8/MMBtu in 'irrational' market

US natural gas spot and futures prices soared above $8/MMBtu in May 4 trading, continuing a three-day rally as market watchers expressed doubts on whether the fundamentals support such a surge.

The NYMEX Henry Hub June contract settled 46.10 cents higher at $8.415/MMBtu May 4, preliminary settlement data from CME Group shows.

The prompt-month futures contract last settled above $8/MMBtu in August 2008.

The ongoing rally has seen the June contract move more than $1.50 higher over the last five trading sessions. Futures prices began to rise in mid-March after spending most of the first-quarter winter demand season in a more moderate $3-$4.50/MMBtu range.

The May 4 rally in the US physical spot gas market extended to every region, regardless of each region's underlying May 5 supply and demand fundamentals. In the Southeast, Henry Hub cash jumped 44 cents to reach $8.295/MMBtu at preliminary settlement, while in the Northeast, the Algonquin city-gates rose 20 cents to $8.46/MMBtu. Turning to the Upper Midwest, the Chicago city-gates traded 23 cents higher to reach $8.21/MMBtu. In the Rockies, the Cheyenne Hub climbed 24 cents to reach $8.05/MMBtu and, in East Texas, the Houston Ship Channel surged 42 cents to reach $8.22/MMBtu.

Just seven days earlier, most US spot gas prices were trading in the $6-$7/MMBtu range.

Futures rally

"I don't want to call it a bubble, but we have a lot of exuberance, and much of it is irrational," Stephen Schork, principal at The Schork Report, told S&P Global Commodity Insights in a phone interview. "End-users are in panic mode, so any pullback will be limited because that will be an opportunity for hedgers to lock in prices."

Jay Levine, a commodity futures broker, had a similar interpretation of the price rally, attributing much of it to market sentiment.

"You and I can intelligently talk about what natural gas should be valued at, but it is kind of meaningless at this point. It is what it is," Levine said. "We are returning to the olden days where the markets reacted to things outside the existing fundamentals forces: namely, fear premiums and [an] improving technical picture."

Technical indicators, such as the parabolic SAR and MACD, took a sharply bullish turn May 2, Schork said.

Fundamentals

Taking a look at the fundamentals, much has been made of the lack of production response from US gas producers as prices have climbed.

While US gas production continues to lag the highs observed in late 2021, month-to-date production has come in around 500 MMcf/d higher than the same time a year ago, S&P Global data showed. Imports from Canada have also exceeded year-ago levels, coming in 1.7 Bcf/d stronger so far this May.

That said, demand also come in higher than year-ago levels.

Lingering cold weather in the Midwest and Northeast has kept residential-commercial gas demand 4 Bcf/d higher so far this month than early May 2021, and power burn demand has been observed at 600 MMcf/d higher.

A heat wave forecast in Texas is expected to boost gas-fired power demand for May 7-10, according to S&P Global projections.

Outlook

Alan Levine, CEO at brokerage Powerhouse, highlighted in a phone interview that US natural gas market dynamics have shifted substantially in recent years, leading to more pricing uncertainty.

"The terms and conditions of natural gas markets are just not the same as they used to be," Levine said. "All you can do is speculate [on] what might happen."

Part of the changing conditions can be attributed to the retirement of alternatives to gas-fired power generation, such as coal and nuclear, Schork said, which has made gas demand less responsive to price.

All three market watchers posited that even higher prices could be ahead while emphasizing the rally's unpredictability.