Nat-Gas Prices Fall on Mixed U.S. Weather Outlook

Aug Nymex natural gas (NGQ22) on Wednesday closed down -0.013 (-0.24%).

Nat-gas prices Wednesday closed slightly lower but remained above Tuesday's 3-month low.  A mixed weather pattern is negative for nat-gas prices after the Commodity Weather Group said Wednesday that hot weather would be seen in the West and Texas from July 11-15 but that the eastern half of the U.S will see normal temperatures through July 20.  Also, a rally in the dollar index (DXY00) Wednesday to a new 20-year high is bearish for nat-gas prices.

Nat-gas prices are also under pressure due to the prolonged outage at the Freeport LNG export terminal, which threatens to curb U.S nat-gas exports and boost domestic supplies.  Last Thursday, a federal regulator said the Freeport LNG terminal, which has been shut since a June 8 explosion, can't restart without written permission from the Biden administration.  That raises concern that the terminal may be closed even longer than the 90 days first projected.  

Freeport LNG, on June 17, declared force majeure on its LNG shipments loading from its fire-damage export plant until the first week of September.  The Freeport terminal on June 14 said it targets 90 days for a partial restart, but a return to full operations isn't expected until later this year.  The 90-day timeline is much longer than the three weeks that were initially anticipated.  U.S. nat-gas inventories are likely to increase since exports will be limited.  The Freeport LNG terminal receives about 2 bcf, or 2.5%, of the output from the lower 48 U.S. states.  BNEF data shows LNG net flows to U.S. LNG export terminals Wednesday was 11.1 bcf, up +6.4% w/w.

Nat-gas prices have support after Russia recently said that foreign buyers of its gas would need to open special ruble and foreign currency accounts to buy Russian gas.  Russia has already halted nat-gas shipments to Demark, Finland, Bulgaria, the Netherlands, and Poland and reduced supplies to Germany for not paying for Russian gas in rubles.

Stronger U.S. nat-gas production is bearish for prices as BNEF data showed lower-48 dry gas production Wednesday at 95.5 bcf, up +1.5% y/y.

Near-normal U.S. temperatures have reduced domestic demand for nat-gas to power air-conditioners.  Lower 48 state total gas demand Wednesday was 69.7 bcf, up -1.4% y/y.

An increase in U.S. electricity output is bullish for nat-gas demand from utility providers.  The Edison Electric Institute reported last Wednesday that total U.S. electricity output in the week ended June 25 rose +4.8% y/y to 89,484 GWh (gigawatt hours).  Also, cumulative U.S. electricity output in the 52-week period ending June 18 rose +2.5% y/y to 4,100,606 GWh.

As a longer-term bullish factor, the ongoing drought in the U.S. West has drained rivers and reservoirs, with Lake Mead recently falling to a record low.  That threatens to curb power produced by hydropower dams and will prompt electric utilities in the U.S. West to boost usage of nat-gas to increase electricity to satisfy power demand for air-conditioning this summer.  The U.S. Energy Information Administration said on June 1 that the drought could drive down generation at California's hydro dams between June and September to 7 million megawatt-hours, well below the 13 million megawatt-hour median for summer generation between 1980 and 2020.

The consensus is for Thursday's weekly EIA nat-gas inventories to climb by +75 bcf.

Last Thursday's weekly EIA report was bearish for nat-gas prices as it showed U.S. nat gas inventories rose +82 bcf to 2,251 bcf in the week ended June 24, above expectations of +74 bcf.  However, inventories remain tight and are down -12.0% y/y and -12.5% below their 5-year average.

Baker Hughes reported last Friday that the number of active U.S. nat-gas drilling rigs in the week ended July 1 fell -4 to 153 rigs, falling back from the prior week's 2-3/4 year high of 157 rigs.  Active rigs have more than doubled from the record low of 68 rigs posted in July 2020 (data since 1987).
 

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