US natural gas drops 7% to 5 week low on record output, global price drop

U.S. natural gas futures dropped about 7% to a five-week low on Friday with output holding near a monthly record and as global gas prices slumped.

In what has already been a volatile week, that U.S. price decline came after prices dropped about 9% on Thursday due to a tentative deal to avert a rail strike and on a bigger-than-expected storage build last week. On Wednesday, prices soared about 10% on worries about the potential rail strike.

In addition to rising output, the drop in U.S. gas prices also came on expectations demand would decline when the Cove Point liquefied natural gas (LNG) plant in Maryland shuts for a couple weeks of maintenance in October.

U.S. gas demand has already been reduced for months by the ongoing outage at the Freeport LNG export plant in Texas which has left more gas in the United States for utilities to inject into stockpiles for next winter.

Freeport, the second-biggest U.S. LNG export plant, was consuming about 2 billion cubic feet per day (bcfd) of gas before it shut on June 8. Freeport LNG expects the facility to return to at least partial service in early to mid-November.

Front-month gas futures fell 56.0 cents, to settle at $7.764 per million British thermal units (mmBtu), their lowest close since Aug. 8.

That put the front-month down about 3% for the week, marking the first time the contract fell for four weeks in a row since March.

So far this year, gas futures are up about 109% as higher prices in Europe and Asia keep demand for U.S. LNG exports strong. Global gas prices have soared due to supply disruptions and sanctions linked to Russia’s Feb. 24 invasion of Ukraine.

Gas was trading around $55 per mmBtu in Europe and $42 in Asia. That was a 12% drop for European futures.

Russian gas exports via the three main lines into Germany – Nord Stream 1 (Russia-Germany), Yamal (Russia-Belarus-Poland-Germany) and the Russia-Ukraine-Slovakia-Czech Republic-Germany route – have averaged just 1.3 bcfd so far in September, down from 2.5 bcfd in August and 10.8 bcfd in September 2021.

U.S. gas futures lag far behind global prices because the United States is the world’s top producer with all the fuel it needs for domestic use, while capacity constraints and the Freeport outage prevent the country from exporting more LNG.

Data provider Refinitiv said average gas output in the U.S. Lower 48 states rose to 99.0 bcfd so far in September from a record 98.0 bcfd in August.

With the coming of cooler autumn weather, Refinitiv projected average U.S. gas demand, including exports, would slip from 93.1 bcfd this week to 92.5 bcfd for the next two weeks, similar to Thursday’s outlook.

The average amount of gas flowing to U.S. LNG export plants rose to 11.3 bcfd so far in September from 11.0 bcfd in August. That compares with a monthly record of 12.9 bcfd in March. The seven big U.S. export plants can turn about 13.8 bcfd of gas into LNG.

Cove Point LNG in Maryland usually shuts in October for a couple weeks of maintenance.

Separately, some traders noted Typhoon Nanmadol could cause some LNG demand destruction after it hits Japan over the weekend.

The reduction in exports from Freeport has been a problem for Europe, where most U.S. LNG has gone this year as countries there wean themselves off Russian energy.

Gas stockpiles in northwest Europe – Belgium, France, Germany and the Netherlands – were currently about 5% above their five-year (2017-2021) average for this time of year, according to Refinitiv. Storage was currently around 86% of capacity.

That is much healthier than U.S. gas inventories, which were still about 11% below their five-year norm.

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