U.S. natgas prices fall 4% to fresh 3-year low on rising output, weak demand

(Reuters) - U.S. natural gas futures fell about 4% on Friday to a fresh three-year low on near-record output, ample amounts of fuel in storage, forecasts for milder weather and less heating demand over the next two weeks than previously expected, and low amounts of gas flowing to LNG export plants due to an outage at Freeport LNG's facility in Texas.

The combination of near-record production and mostly warmer-than-usual weather and low heating demand so far this winter, other than an Arctic freeze in mid-January, has allowed utilities to leave more gas in storage. Analysts forecast inventories were currently about 15% above normal levels for this time of year.

Energy traders said low prices are usually the cure for low prices by encouraging power generators to burn more gas instead of coal and prompting producers to cut back on gas drilling.

But with the retirement of dozens of coal plants in recent years, there's not much coal left to replace, while renewable sources of power like wind and solar continue to take market share from fossil fuels.

As for production, even if energy firms cut back on gas drilling, gas output is still expected to rise because oil prices <CLc1> are high, encouraging producers to seek more oil in shale basins like the Permian in Texas and New Mexico and Bakken in North Dakota. That's because a lot of associated gas also comes out of the ground with the oil in those shale basins.

The collapse of gas prices this week elevated the oil-to-gas ratio to its highest since May 2012.

Front-month gas futures <NGc1> for March delivery on the New York Mercantile Exchange were down 6.7 cents, or 3.5%, to $1.850 per million British thermal units (mmBtu) at 10:53 a.m. EST (1553 GMT), putting the contract on track for its lowest close since September 2020 for a third day in a row.

For the week, the front-month was down about 11% after dropping about 23% last week.

SUPPLY AND DEMAND

Financial company LSEG said gas output in the U.S. Lower 48 states has risen to an average of 105.7 billion cubic feet per day (bcfd) so far in February, up from 102.1 bcfd in January, but still short of the monthly record high of 106.3 bcfd in December.

Meteorologists projected the weather in the Lower 48 states would turn from warmer than normal now to mostly near normal from Feb. 17-24. That is less cold than previously forecast.

Still, with seasonally colder weather coming, LSEG forecast U.S. gas demand in the Lower 48, including exports, would rise from 122.3 bcfd this week to 123.2 bcfd next week and 130.3 bcfd in two weeks. The forecasts for this week and next were lower than LSEG's outlook on Thursday.

Gas flows to the seven big U.S. LNG export plants slid to an average of 13.5 bcfd so far in February, down from 13.9 bcfd in January and a monthly record high of 14.7 bcfd in December.

Analysts do not expect U.S. LNG feedgas to return to record levels until Freeport LNG is back at full power, which could occur in mid- to late-February.

The U.S. became the world's biggest LNG supplier in 2023, ahead of recent leaders Australia and Qatar, as much higher global prices fed demand for more exports due in part to supply disruptions and sanctions linked to Russia's war in Ukraine.

Gas was trading at a six-month low of around $9 per mmBtu at the Dutch Title Transfer Facility (TTF) benchmark in Europe <RNLTTFMc1>. It was also trading around $9 at the Japan Korea Marker (JKM) benchmark in Asia JKMc1. [NG/EU]

(Reporting by Scott DiSavino; Editing by Paul Simao)

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