Nat-Gas Prices Bounce Higher on Fund Short Covering

March Nymex natural gas (NGH23) on Wednesday closed up +0.101 (+4.87%).

Mar nat-gas prices Wednesday recovered from a 2-1/4 year nearest-futures low and closed sharply higher.  Fund short covering emerged Wednesday after nat-gas prices fell to $2.00 per MMBtu.  Nat-gas prices have been in freefall over the last three months.  A combination of weaker-than-anticipated winter heating demand and an industrial outage at a Texas nat-gas export terminal curbed U.S. nat-gas exports and buried the domestic market in excess supplies.  January was the sixth-warmest across the contiguous 48 U.S. states in data from 1895.

Lower-48 state dry gas production on Wednesday was 98.7 bcf (+4.7% y/y), moderately below the record high of 03.6 bcf posted on Oct 3, according to BNEF.  Lower-48 state gas demand Wednesday was 85.6 bcf/day, up +0.6% y/y, according to BNEF.  On Tuesday, LNG net flows to U.S. LNG export terminals were 12.8 bcf/day, down -0.6% w/w.

Nat-gas prices have fallen sharply over the past three months as abnormally mild weather across the northern hemisphere erodes heating demand for nat-gas.  This winter's warm temperatures have caused rising nat-gas inventories in Europe and the U.S., with gas storage across Europe currently 64% full as of Feb 20, far above the 5-year seasonal average of 43%.  Also, U.S. nat-gas inventories are +8.8% above their 5-year average as of Feb 10.

Analytics Group said in a recent note to clients that nat-gas prices face "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 positive factor is the partial reopening of the Freeport LNG export terminal, which is boosting U.S. nat-gas exports.  The resumption of nat-gas exports from Freeport will curb U.S. gas inventory builds and is bullish for prices.

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 Jun 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 Feb 11 fell -5.3% y/y to 75,319 GWh (gigawatt hours).  However, cumulative U.S. electricity output in the 52-week period ending Feb 11 rose +1.5% y/y to 4,111,588 GWh.

The consensus is for Thursday's weekly EIA nat-gas inventories to fall -64 bcf.

Last Thursday's weekly EIA report was bearish for nat-gas prices since it showed U.S. nat gas inventories fell -100 bcf, less than expectations of -108 and a much smaller draw than the 5-year average draw of -166 bcf for this time of year.  Nat-gas inventories are now +8.8% above their 5-year seasonal average, the most in 2 years.

Baker Hughes reported last Friday that the number of active U.S. nat-gas drilling rigs in the week ended Feb 17 rose by +1 to 151 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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