Nat-Gas Falls as Heating Demand Wanes and Inventories Climb

March Nymex natural gas (NGH23) on Friday closed down -0.046 (-1.87%).

March nat-gas Friday tumbled to a 2-year nearest-futures low and closed moderately lower.  The main bearish factor is a warmer-than-normal U.S. winter that has curbed heating demand for nat gas and boosted inventories.  Thursday's EIA report showed that U.S. nat-gas inventories are 6.7% above the five-year average, the biggest surplus in 2 years.  In addition, the Commodity Weather Group said temperatures would climb to above-normal levels across the eastern half of the U.S. next week, easing heating demand and potentially boosting nat-gas inventories even higher.  

A report last Friday from Rystad Energy weighed on gas prices when Rystad said nat-gas prices might fall to as low as $2 per million British thermal units in the next few months as rising supplies are poised to outpace demand.

EBW Analytics Group said in a note to clients last 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 72% full as of Jan 31, far above the 5-year average for this time of year of 52%.  Also, U.S. nat-gas inventories are +6.7% above their 5-year average as of Jan 27, the most in 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" 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.

An excessive short position by commodity funds could fuel any short-covering rally.  Last Friday's weekly Commitment on Traders (COT) report showed funds boosted their net-short nat-gas positions by 16,155 to a 3-year high of 32,190 short positions in the week ended Jan 24.

Lower-48 state dry gas production on Friday was 97.6 bcf (+10.7% y/y), moderately below the record high of 103.6 bcf posted on Oct 3, according to BNEF.  Lower-48 state gas demand Friday was 112.7 bcf/day, up by +7.1% y/y, according to BNEF.  On Friday, LNG net flows to U.S. LNG export terminals were 11.9 bcf/day, down -6.4% 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 28 fell -6.7% y/y to 79,377 GWh (gigawatt hours).  However, cumulative U.S. electricity output in the 52-week period ending Jan 28 rose +1.6% y/y to 4,116,268 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 slightly bullish for nat-gas prices since it showed U.S. nat gas inventories fell -151 bcf, more than expectations of -143 bcf but below the 5-yar average draw of -181 bcf for this time of year.  Nat-gas inventories are now +6.7% above their 5-year seasonal average, the most in two years.

Baker Hughes reported Friday that the number of active U.S. nat-gas drilling rigs in the week ended Feb 3 fell by -2 to 158 rigs, modestly 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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