Natural gas futures slip 3.4% as July contract expires, heat looms

July natural gas futures expired 3.4% lower at $3.231/mmBtu as traders shifted focus to the August contract and a looming heat wave across the US.

NYMEX natural gas futures ended lower Tuesday as the expiring July contract fell 3.4% to $3.231 per million British thermal units, while the most-active August contract slipped 0.5% to $3.279/mmBtu.

"The next test is whether the new prompt month can hold the recent gains as traders move past expiration and focus more directly on July heat, LNG strength, and whether injections begin to slow enough to challenge the storage surplus," Gelber & Associates said in a note.

Earlier in the session, the July contract had traded as high as $3.360/mmBtu, up 0.5%, and the August contract rose 1% to $3.328 before both reversed course. The expiration-day reversal is a common pattern as traders close out positions ahead of final settlement, but the magnitude of the decline — 3.4% from the prior close — reflects the uncertainty surrounding near-term supply-demand balances.

A wave of above-normal temperatures moving across the US over the next two weeks is expected to boost cooling demand for natural gas-fired power generation. The National Weather Service's six- to 10-day outlook shows above-average temperatures across the Midwest, Northeast, and parts of the South, regions that account for a significant share of gas-fired power demand during summer months. Record heat is forecast into the start of the July Fourth holiday weekend, which could provide an upward bias for NYMEX futures in the near term, according to Eli Rubin of EBW Analytics.

On the supply side, domestic production has been trending higher, leaving a softer medium-term outlook, Rubin added. The US Energy Information Administration's weekly storage data showed inventories at 2.85 trillion cubic feet as of mid-June, approximately 15% above the five-year average of 2.48 tcf. The surplus has narrowed from 22% in early May as injection rates have lagged seasonal norms, but the overhang remains substantial enough to cap any sustained rally absent a prolonged demand shock.

Liquefied natural gas exports continue to provide a floor under prices, with feedgas flows to US LNG terminals averaging 13.5 billion cubic feet per day in June, near record levels. The combination of rising LNG demand and seasonal cooling needs could accelerate the drawdown of the storage surplus if above-normal temperatures persist through July. Freeport LNG's Train 3, which returned to full service earlier this year, has added roughly 0.7 bcf/d of incremental demand.

The August contract's settlement at a $0.048/mmBtu premium to the expired July contract reflects the market's expectation of tighter conditions ahead. The contango structure has narrowed from $0.12/mmBtu a month ago, signaling that traders are pricing in a gradual tightening of the physical market as summer progresses.

The market's next major data point comes Thursday with the EIA's weekly storage report. Analysts surveyed by S&P Global Commodity Insights expect an injection of 68 bcf for the week ended June 26, compared with the five-year average build of 82 bcf. A smaller-than-expected build would signal that the combination of heat and LNG demand is beginning to erode the storage surplus, potentially supporting futures prices into July.

This article is for informational purposes only and does not constitute investment advice.