Some of the hottest weather on record is lifting natural-gas prices, reversing last month's plunge and reviving a key driver of inflation.
Natural-gas futures have jumped 48% this month—including 10% on Wednesday—to $8.007 per million British thermal units. That is still more than $1 off the 14-year high hit just before a Texas natural-gas export facility caught fire in early June and sent prices tumbling along with the outlook for exports. Yet the power-plant and manufacturing fuel has bounced back to more than twice the price of a year ago, adding cost pressure across the economy.
Falling commodity prices have been encouraging hopes that inflation has peaked, but the heat wave , which has enveloped nearly the entire country and is forecast to linger possibly into August, threatens to send prices for key raw materials climbing anew.
Coal, like gas , is in high demand from power producers struggling to generate enough electricity to run air conditioners. The American corn crop is in its pollination stage, when high heat and low moisture can reduce yields and contribute to higher prices for staples ranging from gasoline to ground beef. Pricier natural gas adds not just to the cost of dialing down the thermostat but also to that for making fertilizer, steel, cement, plastic and glass.
Natural-gas prices surged this year as demand from utilities, manufacturers and overseas buyers, especially in Europe , outpaced supply growth and kept inventories well below normal. Facing shortages of roughnecks and rigs, and focused more on pumping out dividends than boosting output, drillers have generally held production steady.
A fire at Freeport LNG's export terminal south of Houston knocked the facility offline in early June and changed the market's course. Prices dropped on the assumption that until the facility resumed operations later this year, a lot of fuel that had been destined for overseas markets would instead wind up in domestic storage facilities. Baking heat changed the market math.
"The weather has been so hot that all this demand that we thought would be lost from Freeport, we haven't lost it at all," said Eli Rubin, senior analyst at the energy consultant EBW Analytics. "The entire country is running their air conditioners."
A forecast model that gas traders follow predicts that this week and next will be the hottest in four decades as gauged by cooling-degree days, a population-weighted measure of temperatures above 65 degrees Fahrenheit. Traders and analysts expect Wednesday to have produced the highest daily reading ever.
Mr. Rubin and other analysts said demand could prevent enough fuel from being stored for the winter and increase the risk of price surges and shortages when gas is needed for heat.
In the past, coal kept a lid on summer gas demand and prices. If gas prices rose too high, utilities would turn to their coal plants . The U.S. power sector has retired about a third of its coal-fired generating capacity since 2010, though, which means that switching is no longer an option for some. Utilities that still have flexibility must contend with coal prices that are about triple what they were a year ago because of low supplies and reduced mining.
The last two summers have been unusually hot in the Northern Hemisphere, which drew down gas stockpiles and set the stage for this year's surging prices. Meteorologists expect a rare, third-consecutive La Niña weather pattern to make 2022 another scorcher.
The heat this month stands out because it is everywhere, said Rhett Milne, chief meteorologist at NatGasWeather.com. Often there are showers in the Southeast or cool pockets in the North, but lately it is hard to find places that haven't been hotter than 90 degrees. Swaths of the country have endured triple-digit temperatures.
The drought in the West has reduced hydropower output this year, adding to the power strain and gas demand. The Energy Information Administration recently estimated that California hydroelectric generation would be roughly half its normal output this summer if the drought persists.
To meet peak demand, power producers fire up the plants they keep on standby only for the hottest days. These facilities are usually the oldest and least efficient and can consume as much as twice the gas as newer generators to produce a megawatt of power, Mr. Rubin said.
"You start relying on increasingly inefficient power plants to keep the lights on," he said.