HomeNewsU.S. natural gas futures drop 4% on rising output, milder weather

U.S. natural gas futures drop 4% on rising output, milder weather

4/3/2023

(Reuters) - U.S. natural gas futures dropped about 4% on Monday on rising output and forecasts for milder weather and less heating demand than previously expected, which should allow utilities to start injecting gas into stockpiles this week.

That price decline occurred despite a rise in the amount of gas flowing to liquefied natural gas (LNG) export plants to a record high in March after Freeport LNG's export plant in Texas exited an eight-month outage in February and returned to full power over the past week. Freeport LNG shut in June 2022 after a fire.

Front-month gas futures for May delivery on the New York Mercantile Exchange (NYMEX) were down 8.8 cents, or 4.0%, to $2.128 per million British thermal units at 9:06 a.m. EDT (1306 GMT). On Friday, the contract jumped 5% to its highest close since March 24.

The market has been extremely volatile in recent weeks with the front-month gaining or losing more than 5% in 11 of the past 21 trading days.

With gas market volatility rising, open interest in NYMEX gas futures rose to 1.34 million contracts on Friday, the most since October 2021. Open interest in the front-month contract alone rose to more than 385,000 contracts on Friday, the most since March 2020.

The drop in gas prices coupled with a 20% increase in crude futures over the past couple of weeks boosted oil's premium over gas to its highest in almost 11 years. That premium has prompted U.S. energy firms to focus drilling activity on finding more oil instead of gas in recent years.

The oil-to-gas ratio, or level at which oil trades compared with gas, jumped to 39-to-1 on Monday, its highest since May 2012. Crude's premium has averaged 29 times over gas so far in 2023, 15 times over in 2022 and 20 times over during the past five years (2018-2022). On an energy equivalent basis, oil should trade six times over gas.

Last week, gas speculators cut their net short futures and options positions on the New York Mercantile and Intercontinental Exchanges for a fifth week in a row to their lowest since July 2022, according to the U.S. Commodity Futures Trading Commission's Commitments of Traders report.

Freeport LNG's export plant was on track to pull in about 2.2 billion cubic feet per day (bcfd) of gas on Monday, up from 2.0 bcfd on Sunday, according to data provider Refinitiv.

That is more than the 2.1 bcfd of gas Freeport LNG can turn into LNG for export. LNG plants can pull in more gas than they can turn into LNG because they use some of the fuel to power equipment used to produce LNG.

Average gas flows to all seven big U.S. LNG export plants have risen to 14.1 bcfd so far in April, up from a record 13.2 bcfd in March.

Supply and demand

Refinitiv said average gas output in the U.S. Lower 48 states has risen to 100.1 bcfd so far in April, up from 98.7 bcfd in March. That compares with a monthly record of 100.4 bcfd in January 2023.

Meteorologists projected the weather in the Lower 48 states would remain mostly warmer than normal through April 18, except for a few days from April 6-8 that will be near to colder than normal.

With warmer spring-like weather expected to keep reducing the amount of gas burned to heat homes and businesses,Refinitiv forecast U.S. gas demand, including exports, would drop from 102.7 bcfd this week to 97.9 bcfd next week.

Those forecasts were lower than Refinitiv's outlook on Friday.

Mostly mild weather over the winter of 2022-2023 allowed utilities to leave more gas in storage and should enable them start injecting fuel into inventories this week.

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