Nat-Gas Prices Soar on Reduced U.S. Gas Production and Tight Supplies
Sep Nymex natural gas (NGU22) on Thursday closed sharply higher by +0.672 (+8.19%).
Sep Nymex natural gas on Thursday soared by +8.19%, adding to the sharp gains in the previous two sessions that have led to an overall +17% rally since Monday's close.
Nat-gas prices have soared in the past three sessions due to very strong global gas demand sparked by the recent heatwaves in the U.S. and Europe, and the continued low level of U.S. nat-gas inventories, which are down -9.9% y/y and -11.9% below the 5-year seasonal average. Also, U.S. nat-gas production has faded a bit in the past few days.
Nat-gas prices Thursday also rallied on news that the Global Forecast System model turned hotter for the Midwest for Aug 16-20.
The market shook off the slightly bearish weekly EIA report that U.S. nat-gas inventories last week rose by +44 bcf, slightly more than expectations of +41 bcf.
Lower-48 dry gas production on Thursday fell to 96.6 bcf/day, +2.7% y/y, according to Bloomberg. Lower-48 state total gas demand on Wednesday was 72.4 bcf/day, up -0.3% y/y, according to Bloomberg NEF data. LNG net flows to U.S. LNG export terminals Wednesday was 11.4 bcf/day, 3.6% 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 July 30 rose +0.6% y/y to 93,723 GWh (gigawatt hours). Also, cumulative U.S. electricity output in the 52-week period ending July 30 rose +3.1% y/y to 4,119,100 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 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.
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 5 rose +4 to 161 rigs, a nearly 3-year high. Active rigs have more than doubled from the record low of 68 rigs posted in July 2020 (data since 1987).
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