U.S. natural gas futures saw a significant rally on Monday, recording the largest intraday gain in over two months.
The surge was driven by a notable shift in weather forecasts, indicating hotter-than-expected conditions across the central and southern United States in the coming weeks. This, combined with a recovery in flows to liquefied natural gas (LNG) export terminals along the Gulf Coast, has boosted expectations for natural gas demand. Concurrently, fund managers who had built large short positions were forced to cover their bets, amplifying the price move.
According to private weather forecaster Commodity Weather Group, temperature forecasts for the coming weeks have turned significantly hotter, especially in the central and southern regions. High temperatures typically increase electricity demand for air conditioning, which in turn raises fuel consumption at natural gas-fired power plants, providing support for gas prices.
Meanwhile, natural gas supply flowing to LNG export terminals on the U.S. Gulf Coast has risen to its highest level in over a month, suggesting some facilities are nearing the completion of seasonal maintenance. Increased LNG terminal flows reduce the amount of gas available for the domestic market, further pushing prices higher.
Fund managers held multi-year high short positions, and the need to cover these positions drove the rally. Data from the U.S. Commodity Futures Trading Commission (CFTC) shows that as of last week, the net short position held by fund managers in benchmark Henry Hub natural gas futures was at its highest level since 2020. Additionally, the outright short position, where funds bet solely on further price declines, reached its highest level since at least 2013, when media began tracking the data. As natural gas prices rose early Monday, these funds were forced to buy back some of their short positions, creating additional buying pressure.
Market analysts noted that when short positions in the natural gas market become excessively concentrated, any positive change in fundamentals can easily trigger a rapid rebound. Eli Rubin, senior energy analyst at EBW Analytics Group, pointed out that in the spring of 2024, the U.S. natural gas market faced a severe oversupply, prompting speculators to build large short positions. A subsequent round of short covering involving about 288,000 contracts pushed natural gas futures nearly $1 per million British thermal units higher. A similar scenario occurred in January of this year, when a historic winter storm disrupted production and boosted demand, combined with short covering, drove futures prices up 75% in just three days.
The September contract rose as much as 5.2%, though high inventories still limit upside potential. On Monday, the U.S. September natural gas futures contract rose as much as 5.2% to $2.801 per million British thermal units, marking the largest intraday gain since May 28. However, current prices remain well below recent highs. Domestic natural gas inventories in the U.S. are still above historical averages, and with new pipeline infrastructure coming online this year, additional gas supply from the Permian Basin in West Texas is expected to enter the market. Therefore, while the combination of hotter weather, higher LNG exports, and short covering has driven a short-term price rebound, ample inventories and growing supply may still cap further upside.