U.S. natgas futures up 2% to 5-week high on hotter weather forecast

U.S. natural gas futures gained about 2% to a five-week high on Friday on forecasts for hotter weather and higher demand next week than previously expected and ongoing problems with shipping a turbine needed to boost output on the Russia-Germany Nord Stream gas pipe.

Extreme heat has already caused U.S. power demand to hit all-time highs many times this summer in several regions, including Texas, as homes and businesses crank up their air conditioners to escape the heat.

Power companies were burning lots of gas to produce all that power in part because coal prices were near record highs, making it uneconomic for many generators to switch to coal-fired plants.

One factor weighing on gas prices this summer was the ongoing outage at the Freeport liquefied natural gas (LNG) export plant in Texas, which has left more gas in the United States for utilities to inject into low stockpiles.

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 estimated the facility will return to partial service in October. Some analysts expect the outage to last longer.

Front-month gas futures on the New York Mercantile Exchange (NYMEX) were up 13.5 cents, or 1.7%, to $8.067 per million British thermal units (mmBtu) at 8:29 a.m. EDT (1229 GMT), putting the contract on track for its highest close since June 13.

For the week, the contract was up about 15%, putting it on track for a third week of gains after rising 16% last week and 5% two weeks ago.

Those gas price increases came at the same time oil futures dropped, cutting oil's premium over gas to its lowest since November 2020. Over the last several years, that premium has prompted U.S. energy firms to focus most of their drilling activity on finding more oil instead of gas because crude was by far the more valuable commodity.

The oil-to-gas ratio, or level at which oil trades compared with gas, dropped to 12-to-1 on Friday. So far in 2022, crude has traded about 17 times over gas. That compares with crude's average premium over gas of 19 times in 2021 and a five-year average (2017-2021) of 20 times. On an energy equivalent basis, oil should trade only six times over gas.

So far this year, the gas front-month is up 117% as much higher prices in Europe and Asia keep demand for U.S. LNG exports strong, especially since Russia’s invasion of Ukraine.

Gas was trading around $49 per mmBtu in Europe and in Asia.

Russian gas exports on 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 jumped to 3.7 bcfd on Thursday from around 1.4 bcfd over the past 10 days while Nord Stream was shut for maintenance.

That was the same as the 3.7-bcfd average during the month before Nord Stream shut but was still much lower than the 9.4 bcfd average in July 2021.

Gas flows on Nord Stream, however, may not rise much in the near future because a turbine Russia said was needed to boost output is stuck in transit in Germany because Moscow so far has not given the go-ahead to transport it back.

Data provider Refinitiv said average gas output in the U.S. Lower 48 states has risen to 96.1 bcfd so far in July from 95.3 bcfd in June. That compares with a monthly record high of 96.1 bcfd in December 2021.

Refinitiv projected average U.S. gas demand including exports would slide from 101.1 bcfd this week to 100.6 bcfd next week and 99.9 bcfd in two weeks as extreme heat starts to ease in some parts of the country. The forecast for next week was higher than Refinitiv’s outlook on Thursday.