Nat-Gas Prices Rally on Reduced U.S. Gas Production

Sep Nymex natural gas (NGU22) on Tuesday closed up +0.369 (+4.71%).

Sep Nymex natural gas on Wednesday rallied sharply for the second consecutive session as U.S. production faded a bit from recent record levels.  Lower-48 dry gas production on Wednesday fell to a 1-month low of 97.3 bcf/day, according to Bloomberg.

Nat-gas prices also saw support from Wednesday's sharp drop in the dollar index, which supported the commodity sector as a whole.

Despite the 2-session rally, nat-gas prices are still seeing downward pressure from cooler weather forecasts.  Commodity Weather Group on Wednesday forecasted below-normal temperatures for the Eastern and Central states during Aug 15-19.

Lower-48 state total gas demand on Wednesday was 72.2 bcf/day, up +1.2% y/y, according to Bloomberg NEF data.  LNG net flows to U.S. LNG export terminals Wednesday was 11.2 bcf/day, +2.1% w/w, according to BNEF.

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 30 rose +0.6% y/y to 93,723 GWh (gigawatt hours).  Also, cumulative U.S. electricity output in the 52-week period ending July 30 rose +3.1% y/y to 4,119,100 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 recently slashed nat-gas exports to Europe to 20% of capacity, putting upward pressure on European nat-gas prices.  Russia has already halted nat-gas shipments to Demark, Finland, Bulgaria, Netherlands, Poland, and Latvia, 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.  Freeport recently reached a deal with regulators to restart operations as soon as October, which was sooner than expected.  The Freeport LNG terminal receives about 2 bcf, or 2.5%, of the output from the lower 48 U.S. states.

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 bearish for nat-gas prices as it showed U.S. nat gas inventories rose +41 bcf to 2,457 bcf in the week ended July 29, above expectations of a +29 bcf increase.  Inventories remain tight and are down -9.9% y/y and -12.1% 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 Aug 5 rose +4 to 161 rigs, a nearly 3-year high.  Active rigs have more than doubled from the record low of 68 rigs posted in July 2020 (data since 1987).
 

• Crude Oil Falls on Weekly EIA Report and Pipeline Restart
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• Nat-Gas Prices Slide on Cooler Weather and High Production