U.S. natgas futures fall close to 3-year low as output rises

U.S. natural gas futures fell about 1% early Friday, nearing a three-year low, as rising gas output offset forecasts for higher cooling demand as weather heats up through mid August.

On its second to last day as the front month, gas futures for August delivery on the New York Mercantile Exchange slid 4.1 cents, or 1.8%, to $2.203 per million British thermal units at 8:39 a.m. EDT (1239 GMT). That was within a few cents of its $2.185 close on June 20, its lowest settle since May 2016.

September futures, which will soon be the front-month, were down about 4 cents to $2.19 per mmBtu, putting them even closer to that three-year low.

For the week, the front-month was on track to fall about 2%, putting it on track to fall for a second week in a row after losing over 8% last week.

Since Tropical Storm Barry hit the central Louisiana coast on July 13, energy firms have been returning Gulf of Mexico wells and platforms to service.

Gas production from the offshore Gulf of Mexico rose to 2.9 billion cubic feet per day (bcfd) on Thursday from 2.8 bcfd on Wednesday, according to data provider Refinitiv. That compares with a low of 1.2 bcfd from July 13-15 after Barry hit. Before the storm, Gulf output was as high as 3.1 bcfd during the first week of July.

With increases in the Gulf of Mexico, output in the Lower 48 states rose to 89.4 bcfd on Thursday from 88.9 bcfd on Wednesday, according to Refinitiv. That compares with an all-time daily high of 91.1 bcfd on July 5 and an average of 82.7 bcfd during this week last year.

Refinitiv projected demand in the lower 48 U.S. states would rise from 89.5 bcfd this week to 90.2 bcfd next week and 91.0 bcfd in two weeks as power generators burn a little more fuel to meet higher air conditioning use and more gas flows to the nation’s liquefied natural gas (LNG) export terminals.

That keeps the power sector on track to burn more than 40 bcfd of gas on average this month, which would break its monthly record of 39.9 bcfd set in July 2018, according to federal energy projections.

The amount of gas flowing to LNG export terminals, meanwhile, rose to 6.1 bcfd on Thursday from 5.7 bcfd on Tuesday and Wednesday, according to Refinitiv data. That compares with a record high of 6.4 bcfd on July 19.

In Asia, LNG futures at the Japan Korea Marker (JKM) fell to $4.45 per mmBtu, their lowest since April 2016. Traders, however, noted that was still more than $2 over the Henry Hub benchmark in Louisiana, which should make it profitable to keep sending U.S. cargoes to Asia.

Gas prices for Friday at the Henry Hub fell to $2.26 per mmBtu, their lowest since November 2016 as moderate weather across much of the country this week caused demand for the fuel for cooling to decline.

In the U.S. Southwest, however, consumers cranked up their air conditioners to escape a brief heat wave this week, boosting next-day power prices for Friday to their highest since February at the Palo Verde hub in the Desert Southwest and SP-15 in Southern California.

Analysts said utilities likely added a bigger-than-usual 52 billion cubic feet (bcf) of gas into storage during the cooler-than-normal week ended July 26. That compares with increases of 31 bcf during the same week last year and a five-year (2014-18) average build of 37 bcf for the period.

If correct, that increase would boost stockpiles to 2.621 trillion cubic feet (tcf), 4.8% below the five-year average of 2.752 tcf for this time of year.

The amount of gas in inventory has remained below the five-year average since September 2017. It fell as low as 33% below that average in March 2019. But with production near record highs, analysts expect stockpiles will reach a near-normal 3.7 tcf by the end of the summer injection season on Oct. 31.