Nat-Gas Surges on Concerns About Tight Winter Supplies

Sep Nymex natural gas (NGU22) on Tuesday rallied sharply to a 3-week high and closed up +6.89%.   Positive carry-over from a surge in European gas prices Tuesday to a 5-1/4 month high supported gains in U.S. nat-gas prices.  The surge in European gas prices will keep foreign demand for U.S. gas supplies firm and keep U.S. nat-gas exports running at full tilt, limiting a build of nat-gas storage ahead of the winter season.  U.S. nat-gas inventories remain tight and are down -9.9% y/y and -11.9% below their 5-year seasonal average.

Lower-48 dry gas production on Tuesday was 95.3 bcf/day, +1.4% y/y, according to Bloomberg.  Lower-48 state total gas demand on Tuesday was 70.2 bcf/day, +2.8% y/y, according to Bloomberg NEF data.  LNG net flow to U.S. LNG export terminals Tuesday was 10.9 bcf/day, down -2.4% 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 Aug 6 rose +11.7% y/y to 96,094 GWh (gigawatt hours).  Also, cumulative U.S. electricity output in the 52-week period ending Aug 6 rose +3.4% y/y to 4,129,180 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.

Last 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 last 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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