Nat-Gas Prices Soar on Global Supply Concerns

Sep Nymex natural gas (NGU22) on Monday closed up +0.344 (+3.68%).  Sep nat-gas Monday rallied to a 14-year nearest-futures high.  Soaring European nat-gas prices provide carry-over support to U.S. nat-gas prices after European nat-gas prices rose more than +13% Monday to a 5-1/2 month high.  Supply concerns are bullish for European gas prices as the Nord Stream pipeline from Russia to Germany will be shut for three days of maintenance on August 31, fueling concerns that the pipeline won't restart as planned after the work is completed.  In addition, the surge in nat-gas prices pushed German electricity rates to a record of over 700 euros per megawatt Monday, 14 times the seasonal average over the past five years.

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.

Lower-48 dry gas production on Monday was 99.4 bcf/day, +7.5% y/y, according to Bloomberg.  Lower-48 state total gas demand on Monday was 70.7 bcf/day, +4.4gs% y/y, according to Bloomberg NEF data.  LNG net flow to U.S. LNG export terminals Monday was 11.0 bcf/day, down +1.9% w/w, according to BNEF.

A decline in U.S. electricity output is bearish 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 13 fell -1.7% y/y to 91,862 GWh (gigawatt hours).  However, cumulative U.S. electricity output in the 52-week period ending Aug 13 rose +3.3% y/y to 4,127,606 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 bullish for nat-gas prices as it showed U.S. nat gas inventories rose +18 bcf to 2,519 bcf in the week ended Aug 12, below expectations of a +32 bcf increase.  Inventories remain tight and are down -10.7% y/y and -12.7% 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 19 fell by -1 to 159 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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