To The Moon

For a long time, natural gas supply and demand have always been closely related to winter demand, showing seasonal characteristics.

Historically, as homes and industries have increased their heating needs during the colder months, the demand for natural gas has surged, driving its price soaring. However, recent market dynamics suggest that volatility in natural gas is no longer limited to winter. As summer approaches, a number of factors are beginning to influence the market, suggesting that our view of natural gas seasonality needs to be changed.

Demand patterns are changing

Increased power generation consumption

The increase in natural gas for power generation is an important driver of demand during the summer months. As the world shifts to cleaner energy sources, natural gas is often seen as a transitional "bridge" fuel due to its lower carbon emissions than coal and oil. For example, natural gas power plants in the United States today account for a considerable proportion of electricity generation. When air conditioning usage surges during the summer months, demand for electricity and natural gas also climbs sharply.

Liquefied Natural Gas (LNG) Exports Increase

Increased exports of liquefied natural gas (LNG) were another factor leading to growth in demand throughout the year. The global pursuit of clean energy solutions has led to a surge in LNG trade, with countries such as the US and Australia emerging as important exporters. This international demand does not follow the traditional seasonal pattern of domestic markets.

For example, countries in Asia and Europe may have very different peak demand periods because of their unique seasonality and economic cycles. This international dimension adds a layer of complexity and changes the seasonal characteristics of natural gas demand.

Indeed, natural gas traders and investors around the world are increasingly focused on managing their exposure to natural gas in the United States, which is partly related to the export of LNG. As of the first half of June 2024, the average daily trading volume of Henry Hub natural gas futures traded by non-U.S. companies has exceeded 120,000 contracts.

"The supply of natural gas in the United States is huge, but the whole world needs natural gas, and everyone is turning to the U.S. market," Jeff White, executive director of energy products at CME group, told me in a recent conversation. "So now everyone is facing the basis risk of U.S. natural gas, so everyone is using Henley Hub futures and options contracts in CME group to hedge this risk."

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Environmental and regulatory considerations

Environmental policies and regulations are increasingly shaping the face of the natural gas market. For example, policies aimed at reducing methane emissions may have implications for production practices and costs. In addition, regulations aimed at improving energy efficiency and promoting electrification may change natural gas consumption patterns in residential and industrial sectors. These policies are likely to have a direct impact on the supply and demand of natural gas.

Supply-side dynamics

Advances in mining technology

Advances in hydraulic fracturing and horizontal drilling technology have revolutionized the natural gas industry. These technologies have unlocked large shale gas reserves (particularly in North America), driving production climbing. The ability to rapidly increase production has, to some extent, freed natural gas supply from the shackles of traditional seasonal constraints. Whether in winter or summer, producers can today respond more quickly to changes in demand.

Storage and inventory management

Storage levels and inventory management are important components of the natural gas supply chain. According to the traditional model, natural gas is injected into storage in summer to cope with strong demand in winter. However, as the impact of demand drivers becomes increasingly pronounced throughout the year, natural gas storage and extraction models are becoming more flexible. This flexibility in inventory management helps stabilize supply and mitigate extreme price fluctuations, regardless of seasonal constraints.

Increased Market Participation

Traders and investors use futures contracts, options, and other derivatives to hedge against price risk or predict market movements. The average daily trading volume (ADV) of natural gas futures contracts in Henley Hub, CME group, has reached a record 578,682 in May, reflecting the potential volatility of the natural gas market throughout the year. The average daily trading volume of Henry Hub natural gas options contracts also hit a record high in May, while the trading volume increased by 80% year-on-year in early June.

The natural gas market is shifting as seasonal patterns become increasingly unpredictable and the role of influencing factors throughout the year increasingly prominent, prompting market participants to actively manage risks. Traditional strategies that rely on winter demand peaks may no longer be sufficient to cope with new circumstances. Instead, they need to understand the various factors influencing the natural gas market in a more nuanced way. The evolution of the market environment has brought both challenges and opportunities. By gaining insight into market dynamics and maintaining resilience, stakeholders can effectively respond to the complex challenges of the natural gas market and seize the opportunities brought by emerging trends.

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