U.S. natural gas futures dropped over 10% on Wednesday after soaring to a 12-year high in the prior session as extreme volatility for energy prices around the world continues.
Analysts said U.S. futures rose on Tuesday as soaring global gas prices kept demand for U.S. liquefied natural gas (LNG) exports high. They said it dropped on Wednesday as the market shifted focus back to the situation in the United States where output is growing and utilities likely added more gas than usual to stockpiles for a fourth week in a row last week.
Since the middle of August, global gas prices have repeatedly hit fresh record highs as Europe worries it may not have enough gas in storage for the winter and insatiable demand for the fuel in Asia caused utilities around the world to compete for available LNG cargoes.
Front-month gas futures on the New York Mercantile Exchange fell 63.7 cents, or 10.1%, to settle at $5.675 per million British thermal units (mmBtu). That was the biggest daily percentage drop since September 2020.
On Tuesday, the U.S. front-month closed up over 9% at its highest since December 2008.
“Price action today has been nearly the opposite of that of yesterday,” analysts at Gelber and Associates said in a report, noting “focus in the market has momentarily shifted back to domestic metrics, and… early expectations for a bearish storage report.”
Weeks of rapid changes in U.S. gas futures boosted implied volatility, used as a determinant of an option’s premium, to an all-time high on Tuesday.
Analysts have said gas stockpiles in some European countries were more than 20% below normal for this time of year. In the United States, meanwhile, inventories were expected to reach about 3.5 trillion cubic feet (tcf) by the end of October. Analysts said that should be enough for the U.S. winter heating season even though that amount would fall short of the 3.7 tcf five-year (2016-2020) average for that time of year.
Belief that the United States will have enough gas in storage for this winter and a lack of capacity to produce more LNG for export has kept U.S. prices from rocketing to the record levels seen in Europe and Asia. However, pipeline constraints and competition for expensive LNG were expected to boost prices to multi-year highs in California and New England this winter.
Data provider Refinitiv said gas output in the U.S. Lower 48 states rose to an average of 91.8 billion cubic feet per day (bcfd) so far in October from 91.1 bcfd in September. That compares with a monthly record of 95.4 bcfd in November 2019.
With gas prices at or near record highs of $46 per mmBtu in Europe and $35 in Asia, versus just over $6 in the United States, traders said buyers around the world would keep purchasing all the LNG the United States could produce.
Data provider Refinitiv said the amount of gas flowing to U.S. LNG export plants slipped from an average of 10.4 bcfd in September to 10.0 bcfd so far in October with short-term upsets at a few Gulf Coast plants and Berkshire Hathaway Energy’s Cove Point LNG export plant in Maryland expected to remain shut for another week of planned maintenance.
But no matter how high global prices rise, the United States only has the capacity to turn about 10.5 bcfd of gas into LNG. Global markets will have to wait until later this year to get more from the United States when the sixth liquefaction train at Cheniere Energy Inc’s Sabine Pass and Venture Global LNG’s Calcasieu Pass in Louisiana are expected to start producing LNG in test mode.