Nat-Gas Prices Sink Amid Mild Winter Weather

Feb Nymex natural gas (NGG23) on Thursday closed down -0.123 (-4.01%).

Feb nat-gas Thursday sank to a 1-3/4 year nearest-futures low. Global nat-gas supply concerns have faded and sparked fund selling of nat-gas futures as warmer winter weather in the Northern Hemisphere has reduced heating demand for nat-gas and allowed the U.S. and Europe to refill their inventories. Nat-gas prices fell sharply despite Thursday's weekly EIA nat-gas inventories falling -91 bcf, a larger draw than expectations of -84 bcf.

EBW Analytics Group said in a note to clients Wednesday that nat-gas prices are facing "extended downside risks over the next 30-45 days" due to a combination of strong production, constrained export demand because of the Freeport LNG terminal shutdown, growing inventory surpluses, and mild winter temperatures.

Nat-gas prices have fallen sharply over the past month as abnormally mild weather across the northern hemisphere erodes heating demand for nat-gas. The warm temperatures this winter have caused rising nat-gas inventories in Europe and the U.S., with gas storage across Europe currently 74% full as of Thursday, far above the 5-year average for this time of year of 58%. Also, U.S. nat-gas inventories are +4.9% above their 5-year average as of Jan 20, the most in nearly two years

A negative factor for nat-gas prices is the continued closure of the Freeport LNG export terminal. On Jan 12, the Rapidian Energy Group said that the Freeport LNG export terminal, closed since an explosion on June 8, will likely be offline "for several more months."  The report cited the delay in the "extensive personnel training" that is being required by federal regulators overseeing the restart of the terminal. The closure of the facility has been bearish for nat-gas prices since the reduction in LNG exports has boosted U.S. nat-gas inventories. The Freeport terminal normally accounts for about 20% of all U.S. nat-gas exports and receives about 2 bcf, or 2.5%, of the output from the lower 48 U.S. states.

Lower-48 state dry gas production on Thursday was 100.3 bcf (+6.4% y/y), modestly below the record high of 103.6 bcf posted on Oct 3, according to BNEF. Lower-48 state gas demand Thursday was 99.8 bcf/day, down by -14.5% y/y, according to BNEF. LNG net flow to U.S. LNG export terminals Thursday was 12.8 bcf/day, up +0.8% w/w.

A decline in U.S. electricity output is bearish for nat-gas demand from utility providers. The Edison Electric Institute reported Wednesday that total U.S. electricity output in the week ended Jan 21 fell -9.7% y/y to 76,887 GWh (gigawatt hours). However, cumulative U.S. electricity output in the 52-week period ending Jan 21 rose +1.9% y/y to 4,121,985 GWh.

Nat-gas prices have support as EU countries agreed to cut nat-gas demand from Russia by 15% by early 2023. Also, Russia recently slashed nat-gas exports to Europe to 20% of capacity, putting upward pressure on European nat-gas prices.

Thursday's weekly EIA report was bullish for nat-gas prices since it showed U.S. nat gas inventories fell -91 bcf, more than expectations of -84 bcf.  However, nat-gas inventories are now +4.9% above their 5-year seasonal average, the most in nearly two years.

Baker Hughes reported last Friday that the number of active U.S. nat-gas drilling rigs in the week ended Jan 20 rose by +6 to 156 rigs, moderately below the 3-1/4 year high of 166 rigs posted in 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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