Natural gas prices are breaking out to the upside again today. After struggling to move above the $2.63 level last week, they broke above that late this morning and have not looked back, as the prompt month July contract briefly moved above the $2.75 level, sitting up almost 5% on the day as of 1 PM EDT. There are a number of reasons for this move; traders report that scrapes over the weekend were tighter, and there were more bullish weather forecast trends in the short and medium-term over the weekend along with continually decreasing production now. As seen below, the National Weather Service has continued to add Cooling Degree Days to the national forecast, and they should be 19% above average through the next 7 days. 

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Of course, these short-term trends were not the only reason we saw such a massive rally in prices. Over the past couple of weeks we have observed substantial tightening within the market, as storage injections the past two weeks have been substantially below seasonal averages, as seen below. 

The focus in much of this output is on Day 5. In our Detailed Weekly Weather Update sent out to clients recently, we analyzed most of the available model guidance for Day 5 to show how temperatures are expected to be significantly above average across much of the East. This should help cooling demand spike, and may be what is rallying spot prices as well. 

Not only that, but in our new Weekly Climate Update that we sent out to subscribers earlier today we highlighted how much bullish weather risk there is this summer into the fall. In this report, we break down monthly weather risks through the winter, but much of the focus was on September where the consensus was surprisingly high for significant warmth and lingering strong cooling demand. Much of our attention in the seasonal timeframe will be focused on September in the coming weeks. 

Concerns of this lingering heat have certainly played a role in this recent rally in natural gas prices, alongside the tightening supply. As supply falls off we saw demand for the previous gas week above that of the year before according to the Energy Information Administration, and a hot week last week combined with these short-term warmer trends should mean that the next two weeks of EIA data should be quite bullish in showing far less gas injected into storage than average. 

In our reports to clients today, we analyzed the few bearish weather risks that do remain possible in capping upside within the market even after the breakout today. In a couple scenarios, prices could even reverse quite rapidly. Out of all of these, the most likely would be further cooler trends to the forecast in early July. Similarly, EIA data this week should be the first data that analyzes what demand was like with spot prices consistently above $2.50, and at some points last week we observed spot prices even higher than the prompt month July price. Early indications are that demand did not fall off quite as much as expected, but the data should be telling. 

Overall, a number of factors have played a role in this recent rally in natural gas prices, including the breakout today. No doubt the weather has played a role, but it should certainly not be seen as the only factor; Total Degree Days are actually not that significantly above average for the time of year. Instead, significant tightening brought on by decreasing production and increasing power burn at these lower prices has helped to balance the market more than some of the June heat we have seen. Still, warmth through the summer would play a role in ensuring that prices remain at these more elevated levels, and more impressive eastern heat (which is not quite on model guidance yet) could bring about even more short-covering with increased volatility to the market.