Nat-Gas Pushes Higher on Expectations of Warm U.S. Temps

Oct Nymex natural gas (NGV22) on Thursday closed up +0.135 (+1.48%).   Oct nat-gas prices Thursday posted moderate gains.  Expectations for hot U.S. temperatures next week that will boost nat-gas demand from electricity providers to power increased air conditioning usage is bullish for prices.  Atmospheric G2 said Thursday that above-average temperatures are expected across most of the U.S. from September 6-10.  However, nat-gas prices fell back from their best levels after Thursday's weekly EIA nat-gas inventories rose +61 bcf, above expectations of +58 bcf.  

Nat-gas prices last 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 last 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 last 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 last 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 dry gas production on Thursday was 98.4 bcf, up +6.8% y/y, according to Bloomberg NEF data.   Lower-48 state total gas demand on Thursday was 70.3 bcf/day, up +13% y/y and the highest for the day since at least 2014 as excessive heat in the U.S. boosts nat-gas demand from electricity providers.  LNG net flow to U.S. LNG export terminals Thursday was 11.1 bcf/day, down -3.6% w/w.

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 27 fell -6.4% y/y to 87,491 GWh (gigawatt hours).  However, cumulative U.S. electricity output in the 52-week period ending Aug 27 rose +2.9% y/y to 4,118,759 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 +61 bcf to 2,640 bcf in the week ended Aug 26, above expectations of a +58 bcf increase and above the 5-year average gain for this time of year at +46 bcf.  However, inventories remain tight and are down -8.0% y/y and -11.3% 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 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).

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