Nat-Gas Prices Slip on Record U.S. Nat-Gas Production

Sep Nymex natural gas (NGU22) on Friday closed down -0.079 (-0.84%).  Nat-gas prices Friday gave up an early advance and turned lower on record U.S. nat-gas production.  Lower-48 dry gas production on Friday was a record 99.9 bcf/day, up +5.4% y/y.  Nat-gas prices Friday initially moved higher on carry-over support from a jump in European nat-gas prices to a new 5-1/2 month high.  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.

Sep nat-gas prices on Tuesday fell back from a 14-year nearest-futures high on the 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 delay an increase in U.S. nat-gas exports and allow U.S. nat-gas storage inventories to build.

Nat-gas prices on Tuesday rose to a 14-year high after 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 surge in European nat-gas prices has sent electricity costs soaring as German electricity prices for next year climbed to a record 995 euros a megawatt-hour on Friday, and French electricity prices jumped to a record 1,130 euros a megawatt-hour.  In crude oil market terms, it's the equivalent of crude at $1,600 a barrel.

Lower-48 state total gas demand on Friday was 72.1 bcf/day, -2.9% y/y, according to Bloomberg NEF data.  LNG net flow to U.S. LNG export terminals Friday was 11.5 bcf/day, up +4.1% w/w and the highest since July 1, 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 and Lake Powell falling to record lows.  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 bearish for nat-gas prices as it showed U.S. nat gas inventories rose +60 bcf to 2,579 bcf in the week ended Aug 19, above expectations of a +55 bcf increase.  Inventories remain tight and are down -9.5% y/y and -12.0% 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 26 fell by -1 to 158 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).

• Crude Oil Prices Decline on Concern Tighter Fed Policy Will Slow Growth
• Nat-Gas Prices Climb on Tightness in Global Supplies
• Crude Oil Prices Slip on Global Energy Demand Concerns
• Nat-Gas Prices Follow European Gas Prices Higher on Supply Concerns