Nat-Gas Prices Under Pressure from Weakness in European Gas Prices

Oct Nymex natural gas (NGV22) on Monday closed down by -0.012 (-0.15%).

Oct nat-gas prices Monday dropped to a 2-month low and closed slightly lower.  Nat-gas prices Monday were under pressure from negative carry-over from a fall in European nat-gas prices to a 1-3/4 month low.

However, nat-gas prices recovered nearly all of their losses Monday on concern that above-normal U.S. temperatures will lead to additional nat-gas demand from electricity providers to run air-conditioning.  Forecaster Maxar Technologies on Monday said that warmer-than-normal temperatures are expected from the West to Texas, particularly in the South-Central U.S., from September 24-28.  

Lower-48 state total gas production on Monday was 99.6 bcf, up +5.7% y/y.  Lower-48 state total gas demand on Monday was 67.7 bcf/day, up +11% y/y.  LNG net flow to U.S. LNG export terminals Monday was 11.5 bcf/day, unchanged w/w.

An increase in U.S. electricity output is bullish for nat-gas demand from utility providers.  The Edison Electric Institute reported last Wednesday that total U.S. electricity output in the week ended Sep 10 rose +3.4% y/y to 83,200 GWh (gigawatt hours).  Also, cumulative U.S. electricity output in the 52-week period ending Sep 10 rose +3.0% y/y to 4,125,542 GWh.

Nat-gas prices have support as EU countries agreed to cut nat-gas demand from Russia by 15% over the next eight months.  Also, Russia recently slashed nat-gas exports to Europe to 20% of capacity, putting upward pressure on European nat-gas prices.  Russia has already halted nat-gas shipments to Demark, Finland, Bulgaria, Netherlands, Poland, and Latvia and reduced supplies to Germany for not acceding to its demand for gas payments in Russian rubles.

Nat-gas prices have seen downward pressure from the prolonged outage at the Freeport LNG export terminal, which curbed U.S nat-gas exports and put upward pressure on domestic supplies.   The Freeport terminal accounted for about 20% of all U.S. nat-gas exports before the explosion on June 8 knocked it offline.  The Freeport LNG terminal receives about 2 bcf, or 2.5%, of the output from the lower-48 U.S. states.  The Freeport terminal said Aug 23 that it won't reopen until early to mid-November, later than a previous announcement of a restart in October.

As a longer-term bullish factor, the ongoing drought in the U.S. West has drained rivers and reservoirs, with Lake Mead and Lake Powell falling to record lows.  That threatens to curb power produced by hydropower dams and will prompt electric utilities in the U.S. West to boost usage of nat-gas to increase electricity to satisfy power demand for air-conditioning this summer.  The U.S. Energy Information Administration said on June 1 that the drought could drive down generation at California's hydro dams between June and September to 7 million megawatt-hours, well below the 13 million megawatt-hour median for summer generation between 1980 and 2020.

Last Thursday's weekly EIA report was bearish for nat-gas prices as it showed U.S. nat gas inventories rose +77 bcf to 2,771 bcf in the week ended Sep 9, above expectations of a +73 bcf increase.  Inventories remain tight, however, and are down -7.8% y/y and -11.3% below their 5-year seasonal average.

Baker Hughes reported last Friday that the number of active U.S. nat-gas drilling rigs in the week ended Sep 16 fell by -4 rigs to 162, falling back from a 3-year high of 166 rigs the week ended Sep 9.  Active rigs have more than doubled from the record low of 68 rigs posted in July 2020 (data since 1987).

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