Nat-Gas Plunges on the Outlook for Warm Winter Weather to Continue

Rich Asplund - Barchart - Wed Feb 8, 2023

March Nymex natural gas (NGH23) on Wednesday closed down -0.188 (-7.28%).

Mar nat-gas Wednesday sold off sharply on expectations that mild winter weather will continue to weigh on heating demand. Forecaster Atmospheric G2 predicts much warmer-than-average temperatures across most of the northern, central, and eastern U.S. through at least Feb 17.

Lower-48 state dry gas production on Wednesday was 99.9 bcf (+6.0% y/y), moderately below the record high of 103.6 bcf posted on Oct 3, according to BNEF. Lower-48 state gas demand Wednesday was 85.7 bcf/day, down by -9.6% y/y, according to BNEF. On Wednesday, LNG net flows to U.S. LNG export terminals were 11.9 bcf/day, down -7.6% w/w.

Nat-gas prices fell sharply over the past two months to a 2-year low last Friday as abnormally mild weather across the northern hemisphere erodes heating demand for nat-gas. The warm temperatures this winter have caused rising nat-gas inventories in Europe and the U.S., with gas storage across Europe currently 69% full as of Feb 7, far above the 5-year seasonal average of 49%. Also, U.S. nat-gas inventories are +6.7% above their 5-year average as of Jan 27, the most in two years.

Analytics Group said in a recent note to clients that nat-gas prices are facing "extended downside risks over the next 30-45 days" due to a combination of strong production, constrained export demand tied to the Freeport LNG terminal shutdown, growing inventory surpluses, and mild winter temperatures.

A negative factor for nat-gas prices is the continued closure of the Freeport LNG export terminal. On Jan 12, the Rapidian Energy Group said that the Freeport LNG export terminal, closed since an explosion on Jun 8, will likely be offline "for several more months." The report cited the delay in the "extensive personnel training" required by federal regulators overseeing the restart of the terminal. The closure of the facility has been bearish for nat-gas prices since the reduction in LNG exports has boosted U.S. nat-gas inventories. The Freeport terminal normally accounts for about 20% of all U.S. nat-gas exports and receives about 2 bcf, or 2.5%, of the output from the lower 48 U.S. states.

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 Feb 4 fell -0.6% y/y to 83,834 GWh (gigawatt hours). However, cumulative U.S. electricity output in the 52-week period ending Feb 4 rose +1.5% y/y to 4,115,800 GWh.

The consensus is that Thursday's weekly EIA nat-gas inventories will fall -199 bcf.

Last Thursday's weekly EIA report was slightly bullish for nat-gas prices since it showed U.S. nat gas inventories fell -151 bcf, more than expectations of -143 bcf but below the 5-yar average draw of -181 bcf for this time of year. Nat-gas inventories are now +6.7% above their 5-year seasonal average, the most in two years.

Baker Hughes reported last Friday that the number of active U.S. nat-gas drilling rigs in the week ended Feb 3 fell by -2 to 158 rigs, modestly below the 3-1/4 year high of 166 rigs posted in the week ended Sep 9. Active rigs have more than doubled from the record low of 68 rigs posted in July 2020 (data since 1987).

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.