Nat-Gas Consolidate Above a 2-Year Low

March Nymex natural gas (NGH23) on Monday closed up +0.047 (+1.95%).

Mar nat-gas Monday posted moderate gains as prices consolidated above last Friday's 2-year low.  However, gains in nat-gas prices were limited by expectations for warmer-than-average U.S. temperatures to curb heating demand for nat-gas.  The Commodity Weather Group said Monday that above-normal temperatures are seen across most of the eastern half of the U.S. over the next two weeks.

Lower-48 state dry gas production on Monday was 99.7 bcf (+10.4% y/y), moderately below the record high of 103.6 bcf posted on Oct 3, according to BNEF.  Lower-48 state gas demand Monday was 90.6 bcf/day, down by -11.6% y/y, according to BNEF.  On Monday, LNG net flows to U.S. LNG export terminals were 12.9 bcf/day, up +3.0% w/w.

Nat-gas prices fell sharply over the past two months to a 2-year low last Friday 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 seasonal average 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.

Analytics Group said in a recent note to clients 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 tied to the Freeport LNG terminal shutdown, growing inventory surpluses, and mild winter temperatures.

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.

A decline in U.S. electricity output is bearish for nat-gas demand from utility providers.  The Edison Electric Institute reported last 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.

Last 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 last 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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