Nat-Gas Prices Jump on a Smaller Build in EIA Inventories

Nov Nymex natural gas (NGX22) on Thursday closed up by +0.306 (+4.76%).

Nov nat-gas prices Thursday recovered from a 1-week low and rallied sharply on a smaller-than-expected build in weekly nat-gas inventories.  The EIA reported Thursday that nat-gas inventories rose +125 bcf, below expectations of +127 bcf.  Also, the outlook for increased nat-gas demand for heating is positive for prices as the Commodity Weather Group said below-normal temperatures are expected across most of the U.S. next week.

Nov nat-gas prices last Monday tumbled to a 2-1/2 month low on record U.S. nat-gas production and reduced U.S. domestic nat-gas demand due to the power outages in the Southeast from Hurricane Ian.  BNEF data showed lower-48 state U.S. nat-gas production last Monday climbed to a record high of 103.6 bcf.

In an underlying bullish factor, last month's sabotage of the Nord Stream 1 undersea nat-gas pipeline and the massive leak under the Baltic Sea means there will be no near-term chance that Russia might reopen the pipeline to begin delivering gas to Europe again.  Prior to the explosions, Russia's state-owned gas company Gazprom had cut off the delivery of gas through that pipeline to Europe under the pretext of technical issues.

Lower-48 state total gas production on Wednesday was 100.8 bcf, up +6.4% y/y.  Lower-48 state total gas demand Wednesday was 64.2 bcf/day, up +1.4% y/y.  LNG net flow to U.S. LNG export terminals Wednesday was 11.1 bcf/day, up +6.9% w/w.

A decline in U.S. electricity output is bearish for nat-gas demand from utility providers.  The Edison Electric Institute reported Thursday that total U.S. electricity output in the week ended Oct 8 fell -7.3% y/y to 69,706 GWh (gigawatt hours).  However, cumulative U.S. electricity output in the 52-week period ending Oct 8 rose +2.2% y/y to 4,116,091 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.

Thursday's weekly EIA report was bullish for nat-gas prices as it showed U.S. nat gas inventories rose +125 bcf to 3,231 bcf in the week ended October 7, below expectations of a +127 bcf increase.  Also, inventories remain tight and are down -4.1% y/y and -6.4% 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 Oct 7 fell by -1 rig to 158, falling back slightly 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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