Nat-Gas Fades a Bit But Still Closes the Week Sharply Higher

Sep Nymex natural gas (NGU22) on Friday closed -1.19% on some long liquidation pressure after the +17% rally seen on Tuesday through Thursday.

However, Sep nat-gas still closed the week sharply higher by +8.7% due to very strong demand caused by the heatwaves in the U.S. and Europe.  In addition, U.S.nat-gas inventories are tight at -11.9% below the 5-year seasonal average.  Also, U.S. nat-gas production has faded a bit this week from the recent record highs.

There was mixed weather news on Friday.  Maxar said that the Global Forecast System weather model turned hotter for the Plains but cooler for Texas for Aug 17-21.

Lower-48 dry gas production on Friday was 96.8 bcf/day, +2.8% y/y, according to Bloomberg.  Lower-48 state total gas demand on Friday was 69.9 bcf/day, -5.7% y/y, according to Bloomberg NEF data.  LNG net flow to U.S. LNG export terminals Wednesday was 11.4 bcf/day, +9.1% 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 in October, which was sooner than earlier 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.

Thursday's weekly EIA report was slightly bearish for nat-gas prices as it showed U.S. nat gas inventories rose +44 bcf to 2,501 bcf in the week ended Aug 5, above expectations of a +41 bcf increase.  Inventories remain tight and are down -9.9% y/y and are -11.9% below their 5-year seasonal average.

Baker Hughes reported Friday that the number of active U.S. nat-gas drilling rigs in the week ended Aug 12 fell by -1 to 160 rigs, which was slightly below the 3-year high of 161 rigs posted in the week ended Aug 5. Active rigs have more than doubled from the record low of 68 rigs posted in July 2020 (data since 1987).
 

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