Despite still having a record level of natural gas in storage for this time of year, analysts at Goldman Sachs say the relatively low trading range of $3.90 to $4.40/MMBtu that the natural gas futures market occupied until early June combined with warm weather has led to tighter fundamentals.

“As we expected, Nymex natural gas prices drifted higher in May and broke out convincingly to the upside…,” wrote a team of Goldman Sachs analysts headed by Allison Nathan. “Hot weather in the U.S., which is forecast to continue in the near term, has been a key driver of the recent rally.”

However, the analysts said also lending support has been tightening shifts in underlying U.S. natural gas supply and demand fundamentals prompted by the lower prior trading range, namely lower liquefied natural gas (LNG) imports, incremental demand from coal-to-gas substitution in power generation and lower domestic high-cost conventional production. “We continue to expect these fundamental ‘levers’ that kick in when prices are too low to limit the downside risk to Nymex gas prices this summer,” they wrote.

The team noted that given current coal prices, recent natural gas price strength suggests coal-to-gas substitution may diminish in the near term and that global LNG supply will also rise in response to higher prices, with some of that supply likely ending up in the U.S. market. The “main risk” to the team’s buoyed price outlook this summer is domestic production growth.

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