A four-week rally in US natural gas futures to a 10-month high fuelled by an unusually hot start to the summer stalled on Wednesday as forecasts turned slightly cooler for the next two weeks. That would reduce the need for the power sector to continue burning record amounts of gas to meet rising air conditioning use.
After rising 27 percent over the past four weeks, front-month gas futures for July delivery on the New York Mercantile Exchange fell 9.1 cents, or 3.3 percent, to settle at $2.677 per million British thermal units. That decline, the biggest since late May, pushed the front-month out of technically overbought territory for the first time in 17 days, ending the longest streak for the Relative Strength Index over 70 since August 1999.
To prevent storage caverns from filling to maximum capacity after a warm winter left stockpiles at record highs, analysts earlier this year estimated prices would remain relatively low in 2016 to pressure producers to cut output and encourage power generators to burn more gas instead of coal. And those predictions were proved right until prices started rallying in early June when the weather turned unusually warm.
Analysts now say the market is no longer worried about storage hitting maximum levels later this autumn because the surplus has narrowed as power generators use record amounts of gas instead of coal to meet rising air conditioning use. Spot prices at the Henry Hub benchmark have averaged $2.02 so far this year, while futures for the balance of 2016 were fetching $2.81. That compares with $2.61 in 2015, the lowest since 1999.
But with spot prices at their highest level since August, some power generators have switched back to coal. The premium of gas futures over coal futures climbed over $1 per mmBtu for the first time since August. Traders say it becomes profitable for some generators to burn coal once the gas premium rises above $1 per mmBtu due to the lower efficiency of coal plants and coal's higher environmental and transport costs. The US power sector has burned on average 25.9 bcf per day so far this year, topping last year's record 23.6 bcfd during the same period, according to Thomson Reuters Analytics.