Freedom: weaker demand could increase pressure on gas ahead of the heating season

In the coming weeks, U.S. natural gas prices may remain under pressure due to a seasonal decline in demand from power plants, Freedom Broker analysts believe. At the same time, a possible significant correction in gas quotes and shares of U.S. gas producers in late September could create an attractive entry point for opening long positions ahead of the start of the heating season.

Natural gas

Natural gas is used in power generation, industry, and heating. Demand for it is highly seasonal: in the U.S., a local consumption low typically falls from the second half of September through mid-October.

The market is approaching a period of low demand

In the coming weeks, prices for gas will be pressured by weaker demand from power plants, Freedom Broker analysts note. In the second half of September, they expect a significant acceleration in the pace of filling U.S. storage facilities.

Over the week, the price of natural gas in the U.S. fell by 5.6% to $2.8 per million British thermal units. Quotes were 3.5% below the level of the same period last year and 31.8% below the five-year average.

Pressure on the market came from forecasts of cooler weather in late September, consistently high production, and a larger-than-expected increase in inventories. Lower temperatures reduce power plants’ need for gas to generate electricity, which supports higher volumes of injections into storage.

Gas inventories rose more than forecast

According to U.S. Department of Energy data for the week ended September 4, the amount of gas in storage increased by 40 billion cubic feet to 3.2 billion cubic feet. The consensus forecast had called for inventories to rise by only 31 Bcf.

Current reserves remain 2.4% below last year’s level, but exceed the five-year average by 4.8%. In the same period last year, inventories rose by 69 Bcf, while the five-year average increase was 52 Bcf. A week earlier, the amount of gas in storage increased by 30 Bcf.

The larger-than-expected injection was a negative signal for quotes: it shows that gas supply allows reserves to be replenished more quickly even as seasonal demand persists.

Shares of gas producers fell by 2.4%

Over the week, shares of the largest U.S. gas producers declined by an average of 2.4%. In Freedom Broker analysts’ view, these stocks have strong long-term upside potential, but in September their performance will be constrained by the seasonal decline in gas demand.

Analysts call a possible sharp correction in late September the most attractive time to open long positions. Such a scenario would allow entry into the assets ahead of the start of the heating season, when gas consumption traditionally begins to recover.

European prices rose by 10.5%

The situation in the European gas market differs from the U.S. As of September 13, European Union storage facilities were 68.0% full versus the five-year average of 84.3%. A week earlier, the figure was 66.6%.

Against the backdrop of relatively low inventories, quotes at Europe’s largest gas hub, TTF, jumped 10.5% over the week to $27.1 per million British thermal units. Thus, while the U.S. market remains under pressure from high production, rising inventories, and the approaching seasonal demand low, European prices are supported by storage filling lagging historical averages.

In the coming weeks, the key factors for the U.S. gas market will remain consumption from power plants and the pace of inventory replenishment. Freedom Broker analysts expect pressure on quotes to intensify in the second half of September, but view a possible decline at the end of the month as a potential entry point ahead of the heating season.

Not an individual investment recommendation.