El Niño, A Hot September And Natural Gas Price Patterns (NYSEARCA:UNG) - Seeking Alpha

El Niño, A Hot September And Natural Gas Price Patterns (NYSEARCA:UNG) | Seeking Alpha

El Niño, A Hot September And Natural Gas Price Patterns
United States Natural Gas Fund, LP ETF (UNG) 2 Comments

Summary

- Hot weather in September can increase electricity demand and reduce injections into storage, leading to price spikes and heightened supply uncertainty in the natural gas market.
- Recent years have seen significant price increases in September due to above-normal heat and hurricane-related supply disruptions.
- Natural gas prices tend to rally more frequently in September during El Niño years, driven by hotter temperatures and storm-related risks.

Fokusiert

While the odds of a major rally in natural gas (NYSEARCA: UNG) to $4 or higher is unlikely unless we have a cold winter, hot weather in September can have a significant effect on the natural gas market in a few key ways:

- Increased electricity demand - As temperatures rise, more air conditioning and cooling use drives up electricity demand. Natural gas is a major fuel for power generation, so gas demand increases.
- Reduced injections into storage - September is normally a key month for injecting natural gas into storage for winter. However, hot weather results in less gas being put into storage as more is consumed to meet higher energy needs.
- Heightened supply uncertainty - Gulf Coast hurricanes threatening production infrastructure become a concern, jeopardizing supply availability heading into winter.
- Price spikes - With supply tightening and demand rising simultaneously, natural gas prices tend to spike higher on hot weather forecasts for September.
- Increased volatility - Gas prices become more volatile and reactive to shifts in weather forecasts as the market focuses closely on temperature outlooks.

Overall, unseasonably hot weather in September strains the natural gas market balance, resulting in supply uncertainties and risks of price spikes. Monitoring cooling demand trends and hurricane forecasts becomes critical for gas market participants during heatwaves.

My exclusive Seeking Alpha video here explains how the recent Florida hurricane initially pressured natural gas prices, but then much hotter September weather coming and potentially more bullish EIA numbers helped prices surge on Wednesday.

Recent September natural gas price spikes

Here are some examples of recent years when natural gas prices rallied 5% or more in September, along with key drivers behind the price increases:

2022 - Natural gas futures rose over 50% in September as hot weather strained supplies. Hurricane Ian also threatened production.

2021 - Prices climbed nearly 9% on surging demand for power generation amid a hot September.

2018 - Gas prices jumped 12% in September due to high cooling demand and supply concerns in the Gulf from Hurricane Florence.

2016 - Futures rose 9% as forecasts predicted a very hot start to fall would extend cooling demand.

2012 - Gas gained 11% in September after an intensely hot summer shrunk storage levels before winter.

2008 - Prices surged nearly 20% in September as Hurricane Ike hit Texas and shut-in over 20% of Gulf gas output.

2005 - Gas futures rallied 15% amid supply disruptions from Hurricane Katrina and very warm temperatures boosting electricity loads.

In most cases, the combination of above-normal heat increasing electricity demand and hurricane-related supply uncertainties drove the notable September price increases. The need for gas-fired cooling clashes with potential production declines.

El Nino and natural gas price tendencies

History would suggest that natural gas prices tend not to rally in September during most weak to moderate El Nino events. However, strong El Nino events tend to have hotter September weather. The upcoming hot September weather is then a strong sign that El Nino will become strong!

CLIMATEPREDICT LONG-RANGE WEATHER FORECAST PROGRAM (WeatherWealth newsletter)

Given the recent collapse in prices, lower US rig counts and my ClimatePredict program showing a hot global September, a modest rally could well happen.

Analyzing the historical data, natural gas prices have a tendency to rally more frequently in September during El Niño years:

- Over the past 20 years, there have been 7 years with El Niño conditions (2002, 2004, 2006, 2009, 2014, 2015, 2018).
- In 5 out of those 7 years, natural gas futures rallied by over 5% in September (71% frequency).
- The average price increase was around 8% during El Niño Septembers.
- The price rallies were driven by hotter than normal temperatures from the weather pattern boosting electricity demand.
- Also, El Niño raises risks of Gulf of Mexico hurricanes which threaten gas infrastructure.
- In contrast, during neutral/La Nina years, prices rallied in September only 38% of the time historically.

So the data shows natural gas has been markedly more likely to see significant September price increases during El Niño autumns due to higher cooling demand and storm-related supply uncertainties than during La Nina events. The hotter weather pattern tends to create tighter market conditions. Monitoring El Niño forecasts is useful for gas price modeling.

Conclusion:

Given my forecast a few weeks ago for a potential hot September, there are certain option strategies an investor could have employed. Nevertheless, while natural gas stocks remain quite large, lower US rig counts, a better technical picture and hot September weather should mean that the ETF ( BOIL) rallies another 10-20% in the coming weeks. I do not feel comfortable given these fundamentals for investors to be in the inverse ETF ( KOLD)

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