Nat-Gas Prices Soar on Surging European Gas Prices and Hot U.S. Temps

Aug Nymex natural gas (NGQ22) on Tuesday closed up by +0.266 (+3.05%).

Aug natural gas prices on Tuesday surged to a 14-year nearest-futures high.  Nat-gas prices have carry-over support from a +13% jump in European gas prices Tuesday after Russia's Gazprom PJSC said it would halt another turbine that pumps gas into the Nord Stream pipeline, cutting gas flows to Europe to just 20% of the pipeline's capacity.  

Nat-gas prices also rallied on forecasts for scorching U.S. temperatures that would boost nat-gas demand from electricity providers to run more air-conditioning.  The National Oceanic and Atmospheric Administration (NOAA) said Tuesday said that hotter-normal temperatures are expected across most of the U.S. July 31-August 4.  According to BloombergNEF data, U.S. domestic nat-gas demand for power generation has jumped by more than +10% this month from the year-earlier period to record levels.

Hot U.S. temperatures have boosted domestic demand for nat-gas to power air-conditioners.  Lower 48 state total gas demand on Tuesday was 75.8 bcf, up +8.9% 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 16 rose +3.4% y/y to 92,684 GWh (gigawatt hours).  Also, cumulative U.S. electricity output in the 52-week period ending July 16 rose +2.8% y/y to 4,108,908 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.  Also, Russian President Putin on Wednesday warned that if a pipeline part for the Nord Steam link that was caught up in sanctions isn’t returned to Russia, then gas flows to Europe will be cut to 20% of capacity as early as next week.  

Stronger U.S. nat-gas production is bearish for prices as BNEF data showed lower-48 dry gas production Tuesday at 96.9 bcf, up +3.4% 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.  On July 14, 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 Tuesday was 10.2 bcf, down -1.6% 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 bullish for nat-gas prices as it showed U.S. nat gas inventories rose +32 bcf to 2,401 bcf in the week ended July 15, below expectations of +43 bcf.  Inventories remain tight and are down -10.3% y/y and -12.0% 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 22 rose +2 to 155 rigs, just 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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