Nat-Gas Prices Follow European Gas Prices Higher on Supply Concerns

Sep Nymex natural gas (NGU22) on Wednesday closed up +0.137 (+1.49%).  Sep nat-gas prices Wednesday shook off early losses and posted moderate gains on carry-over support from a jump of more than +8% in European nat-gas prices to a 5-1/2 month high.  Nat-gas prices are also seeing support from forecasts for hot U.S. temperatures that will boost nat-gas demand from electricity providers to power increased air-conditioning.  The Commodity Weather Group on Wednesday said that above-normal temperatures are expected for the Northwest and Northeast through next week.

Sep nat-gas prices Tuesday fell back from a 14-year nearest-futures high on Tuesday's announcement of a delay in the restart of the Freeport LNG export terminal.  The Freeport terminal said Tuesday that it won't reopen until early to mid-November, later than a previous announcement of a restart in October.  That will further delay an increase in U.S. nat-gas exports and allow U.S. nat-gas storage inventories to build.

Concern about a global nat-gas shortage pushed nat-gas prices up to a 14-year high Tuesday.  Russia said it would halt gas flows through the Nord Stream pipeline to Germany for three days on Aug 31, fueling speculation that the pipeline won't restart as planned after the maintenance work.  The news sent European nat-gas prices Monday to a 5-1/2 month high and pushed German electricity rates to a record high of more than 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 the accumulation of nat-gas storage ahead of the winter season.

Lower-48 dry gas production on Wednesday was 97.5 bcf/day, +3.1% y/y, according to Bloomberg.  Lower-48 state total gas demand on Wednesday was 71.4 bcf/day, -4.3% y/y, according to Bloomberg NEF data.  LNG net flow to U.S. LNG export terminals Wednesday was 11.0 bcf/day, up +3.3% 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 Wednesday that total U.S. electricity output in the week ended Aug 20 fell -3.2% y/y to 86,685 GWh (gigawatt hours).  However, cumulative U.S. electricity output in the 52-week period ending Aug 20 rose +3.1% y/y to 4,124,735 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 Freeport terminal accounted for about 20% of all U.S. nat-gas exports before the explosion on June 8 knocked it offline.  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.

The consensus is for Thursday's weekly EIA nat-gas inventories to climb +55 bcf.

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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