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U.S. natural gas futures soared about 8% to a 10-week high on Friday ahead of the long Martin Luther King Day holiday weekend when extreme cold is expected to boost gas demand to record highs while also cutting gas supplies by freezing wells. In recent years, the combination of soaring demand for gas for heating and power generation at the same time that supplies of the fuel are declining due to freezing wells during massive storms has threatened the reliability of electric and gas systems. This has forced electricity grid operators and utilities to impose rotating outages because many power plants cannot operate due to a lack of fuel or other reasons.
That is what happened in Texas and other U.S. Central states in February 2021 when millions were left without power, water and heat for days, and during Winter Storm Elliott in December 2022 when dozens of power plants shut across the eastern half of the country and New York City’s gas supply system was close to collapse.
Front-month gas futures for February delivery on the New York Mercantile Exchange were up 24.9 cents, or 8.0%, at $3.346 per million British thermal units (mmBtu) at 10:01 a.m. EST (1501 GMT), putting the contract on track for its highest close since Nov. 3.
That kept the front-month in technically overbought territory for a second day in a row and boosted the premium of futures for February over March to 72 cents per mmBtu, their highest since mid-December 2022.
For the week, the front-month was on track to rise by 15% for a second week in a row.
In the spot market, extreme cold was already freezing the Pacific Northwest region, keeping next-day power prices at the Mid-Columbia hub in Oregon at a 16-month high of around $850 per megawatt hour for a second day in a row, while next-day gas prices at the AECO hub in Alberta, Canada, soared to a near one-year high of $2.68 per mmBtu.
But with warmer-than-normal weather expected to return in late January, investors this week cut the number of shares outstanding in the U.S. Natural Gas Fund (UNG) by a record 17.3 million contracts on Jan. 10 and 15.1 million contracts on Jan. 9. Those cuts were more than the prior all-time biggest reduction of 13.8 million contracts on Oct. 11, 2023.
The UNG contracts cut on Jan. 9-10 were worth a total of around $204 million based on UNG prices on those days. UNG is an Exchange Traded Fund (ETF) designed to track the daily price movements of gas.
SUPPLY AND DEMAND
Financial company LSEG said average gas output in the Lower 48 states has fallen to 106.9 billion cubic feet per day (bcfd) so far in January, down from a monthly record of 108.5 bcfd in December.
But on a daily basis, output was on track to drop by 3.6 bcfd over the past five days to a preliminary 10-week low of 104.6 bcfd on Friday. Those output losses were small compared with losses of 19.6 bcfd during Winter Storm Elliott in December 2022 and 20.4 bcfd during the February freeze in 2021.
Meteorologists projected the weather in the Lower 48 states would switch from mostly warmer than normal now to colder than normal from Jan. 13-22 before turning back to mostly warmer than normal from Jan. 23-27.
LSEG forecast U.S. gas demand in the Lower 48 states, including exports, would jump from 136.5 bcfd this week to 160.1 bcfd next week when the weather turns frigid before dropping to 149.6 bcfd in two weeks when milder weather returns. The forecast for next week was lower than LSEG’s outlook on Thursday.
On a daily basis, even though many U.S. businesses and government offices will shut for the long Martin Luther King Day holiday weekend, total U.S. gas demand, including exports, was on track to reach 165.9 bcfd on Jan. 15, 174.3 bcfd on Jan. 16 and 172.9 bcfd on Jan. 17, according to LSEG.
Those daily demand forecasts would top the current all-time high of 162.5 bcfd set on Dec. 23, 2022, during Winter Storm Elliott, according to federal energy data from S&P Global Commodities Insights.
(Reporting by Scott DiSavino in New York Editing by Matthew Lewis)
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