Nat-Gas Prices Soar on Scorching U.S. Temps

Aug Nymex natural gas (NGQ22) on Monday closed up by +0.463 (+6.60%).

Aug natural gas prices Monday rallied sharply for a second session and posted a new 1-month high.  Nat-gas prices surged Monday on expectations for increased demand from electricity providers to run more air-conditioning due to a heat wave engulfing most of the U.S.  Maxar Technologies on Monday said that hotter-than-normal temperatures are forecast across the U.S. mainland from July 23-27.

Hot U.S. temperatures have boosted domestic demand for nat-gas to power air-conditioners.  Lower 48 state total gas demand Monday was 73.4 bcf, up +10.0% 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 July 9 rose +4.8% y/y to 91,757 GWh (gigawatt hours).  Also, cumulative U.S. electricity output in the 52-week period ending July 9 rose +2.7% y/y to 4,105,825 GWh.

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 Monday at 96.7 bcf, up +2.6% y/y.

Nat-gas prices are being undercut by 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 Monday was 11.2 bcf, up +1.9% w/w.

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.

Last Thursday's weekly EIA report was slightly bearish for nat-gas prices as it showed U.S. nat gas inventories rose +580 bcf to 2,369 bcf in the week ended July 8, above expectations of +57 bcf and the 5-year average of +55 bcf.  However, inventories remain tight and are down -9.9% y/y and -11.9% below their 5-year average.

Baker Hughes reported Friday that the number of active U.S. nat-gas drilling rigs in the week ended July 15 was unchanged at 153 rigs, modestly below the 2-3/4 year high of 157 rigs from June 24.  Active rigs have more than doubled from the record low of 68 rigs posted in July 2020 (data since 1987).
 

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