Nat-Gas Prices Fall Sharply on Cooler Weather and High Production

Sep Nymex natural gas (NGU22) on Tuesday closed sharply lower by -0.577 (-6.97%) due to cooler weather forecasts and high U.S. production.  

Maxar Technologies said Tuesday that temperatures in the Northeast and parts of the Southwest will moderate to near normal during Aug 7-11.  

Nat-gas prices on Tuesday were also undercut by news of higher U.S. gas production.  Bloomberg reported Monday that U.S. natural gas production last week in the lower-48 states rose to a weekly record high of 98 bcf/day (+5% y/y) as producers took advantage of high prices.  Lower-48 dry gas production on Tuesday was 96.0 bcf/day, up +2.7% y/y, according to Bloomberg.

Lower-48 state total gas demand on Tuesday was 74.8 bcf/day, up +11% y/y, according to Bloomberg NEF data.  U.S. domestic nat-gas demand for power generation in July jumped by more than +10% y/y to record levels, according to Bloomberg NEF.

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 23 rose +10.8% y/y to 99,445 GWh (gigawatt hours).  Also, cumulative U.S. electricity output in the 52-week period ending July 23 rose +3.2% y/y to 4,118,572 GWh.

Nat-gas prices have support as EU countries agreed to cut nat-gas demand from Russia by 15% over the next eight months.  Also, Russia last week slashed exports of nat-gas to Europe to 20% of capacity, putting upward pressure on European nat-gas prices.  Russia over the weekend cut off gas supplies to Latvia, saying that Latvia "violated the conditions" of its purchases.  Russia has already halted nat-gas shipments to Demark, Finland, Bulgaria, the Netherlands, and Poland and reduced supplies to Germany, for not acceding to its demand for gas payments in Russian rubles.

Nat-gas prices have seen downward pressure from the prolonged outage at the Freeport LNG export terminal, which curbed U.S nat-gas exports and put upward pressure on domestic supplies.  The LNG terminal has been closed since a June 8 explosion, and may remain closed until at least September.  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 11.2 bcf/day, +7.5% 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 +15 bcf to 2,416 bcf in the week ended July 22, below expectations of +19 bcf and below the 5-year average of +32 bcf.  Inventories remain tight and are down -11.0% 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 29 rose +2 to 157 rigs, matching the 2-3/4 year high 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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