Natural gas prices are at their highest levels in three years and rising, bringing higher costs for consumers but also better margins and stock prices for producers. A trifecta of extreme hot weather, increased exports and lower production has helped lift natural gas prices. Production has not yet returned to pre-pandemic levels. At the same time, the level of supply in U.S. storage is below the five-year average. The rally surprised some energy analysts, who now expect prices to remain elevated. The question is how high will they go and how long will they remain high. They do say temporary spikes in prices are possible, but for the most part they do not see a prolonged period of rapidly rising prices. "Natural gas is just generally a market that's subject to significantly higher prices on the back of extreme weather events. That's especially the case with a balance like this," RBC Capital Markets commodity strategist Chris Louney said. Gas stocks rise, along with gas futures The stocks of companies that produce or sell the commodity jumped Wednesday as the price of natural gas futures edged closer to $4 per one million British thermal units, or mmBtus. Natural gas futures for August , were up as much as 1.8% Wednesday afternoon at $3.96 per mmBtu, a gain of 7.4% for the week and nearly 24% over the past month. "The largest producer is EQT . Assuming prices stay high, we expect that stock to do well," said Brian Kessens, senior portfolio manager and managing director at TortoiseEcofin. EQT Corp. shares closed up 5%. Range Resources jumped 5.3%, and Antero Resources rose 6.4% in afternoon trading. Others like Chesapeake , APA Corp. , Southwestern Energy were also higher. Cheniere Energy, a liquified natural gas provider, rose just under 1% and pipeline company Kinder Morgan ended the session up 2.5%. Based on the robust LNG market, Bank of America equity analysts last week raised their target on Cheniere to $100 per share from $90 per share, about $16 above its current price. Rising oil prices also broadly lifted oil and gas stocks. The S & P energy sector was up 3.5% Wednesday as crude rose 4.6%. Kessens said gas producers have been held to the same discipline as oil producers, and the increase in price could help them expand production. "They have promised increasing returns to shareholders in the form of dividends, stock buybacks and debt repayments. If we have higher prices from here, they could do those three things and increase drilling cap ex as well," he said. "Margins should do better. They're operating expenses really are fixed, and any increases in prices drop straight to the bottom line." Hot summer, hot prices The price for natural gas is the highest since 2018, and this year should be the first time gas prices average $3 for a year since then, Kessens said. "The overall set-up is just perfectly bullish," Again Capital partner John Kilduff said. "[The market is] tightly supplied, and the hot summer has impeded the amount of gas in storage. This is the time of year we need to build inventories. We have a record pace of exports of liquified natural gas this year, which is also weighing on the inventory situation. It was a cold winter, and it's a hot summer." Kilduff said the heat has made a big difference to demand from power companies. The industry calculates so-called "cooling degree days," in which air conditioning use is high based on temperatures. This year there were a third more of those days than normal along the East Coast alone. Meanwhile, temperatures soared to record levels in the typically cooler northwestern region of the country. The amount of gas in storage in the U.S. is 2.6 trillion cubic feet, lower than the 3.1 trillion last year and below the 5-year average of 2.8 trillion cubic feet, Kilduff said. New government data on storage will be released Thursday at 10:30 a.m. ET. TortoiseEcofin expects the average price to be just above $3 per mmBtu this year, and about $3.50 per mmBtu next year. Louney said his highest target price scenario for natural gas this year was an average $2.97. The average is already at $2.93. But he expects more production to kick in next year, and his mid-range target for 2022 takes the average back down to $2.70 per mmBtu. Louney said storage levels have kept prices elevated. "This is beyond our expectations going into the season," he said of the price. "It's stronger and more sustained than we would have suspected," Louney added. "I think we'll get to a decent level of storage this winter. I think there's going to be enough gas in storage. But what it means is prices are going to be elevated. Is it going to be a record low? I don't think so. Just as we're seeing tight balances keeping prices elevated, I think in a relative sense, tight balances will continue to be a theme for the year." "Focused on inventories" Francisco Blanch, head of commodities and derivatives strategy at Bank of America, said the market is focused on inventories, but he expects producers to respond to higher prices with more output. He said other factors are also affecting supply and demand, including pipeline issues and lower wind output due to weather. "[Consumers] will have to pay more for electricity, but hopefully the higher price adjusts production higher," he said. Besides power companies, the chemical industry, pulp and paper manufacturers, oil refineries and metals companies are big users of natural gas. The U.S. Energy Information Administration currently put overall U.S. gas production as of April at 113.2 billion cubic feet per day, or bcf/d, including Alaska and offshore production. Pre-Covid, the EIA reported production was at a high of 117 bcf/d in December, 2019. Blanch said dry natural gas production in the lower 48 states should rise to 93 billion cubic feet a day by October, up from 92 bcf/d in June. He expects production to reach an average of 95.5 bcf/d next year. By the fourth quarter of 2022, Blanch predicts production in the lower 48 states will rise to 97 bcf/d. He said it was at 93.9 bcf/d pre-Covid. While Blanch anticipates gas prices will average $3.35 per mmBtu in the second half of this year, he sees the average for next year at $2.80 per mmBtu. "We did modify our views a little bit, but retained a bearish bias on natural gas," he added.. Exports have become an increasing part of the U.S. demand equation. Analysts say the U.S. is exporting about 10 bcf/d of gas as LNG shipments, mostly to Europe and Asia. Demand in those markets have been increasing and prices have shot sky high, into the teens in Europe. Beside LNG, the U.S. exports gas to Mexico via pipelines. "It's fair to say our exports to Mexico are about 7% [of production] … which is something you really didn't see if you go back five years ago," said Kessens. Analysts expect LNG exports to continue to increase, with the U.S. as a swing producer in the global market. Correction: A previous version misspelled Chris Louney's name.
A man walks past the Shahamah liquefied natural gas (LNG) tanker sitting berthed at Tokyo Electric Power Co.'s (Tepco) Futtsu gas-fired thermal power plant in Futtsu Chiba Prefecture, Japan, on Thursday, Jan. 21, 2016.
Tomohiro Ohsumi | Bloomberg | Getty Images
Natural gas prices are at their highest levels in three years and rising, bringing higher costs for consumers but also better margins and stock prices for producers.