U.S. natural gas futures slipped over 1% to a fresh three-week low on Friday as output starts to recover quickly from last week’s freezing weather and on forecasts confirming the weather will remain warmer than normal for the next two weeks.
After weeks of near record volatility, front-month gas futures for March delivery fell 6.1 cents, or 1.5%, to $3.898 per million British thermal units at 11:03 a.m. EST (1603 GMT), putting the contract on track for its lowest close since Jan. 20 for a second day in a row.
For the week, the contract down about 15%, which would be its biggest one-week decline since December.
That drop in gas prices this week and a recent jump in oil futures to its highest since 2014 boosted the premium of oil over gas to its highest since April 2021. 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, jumped to 23-to-1 on Friday. So far in 2022, crude has traded about 20 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.
Data provider Refinitiv said average output in the U.S. Lower 48 states fell from a record 97.3 billion cubic feet per day (bcfd) in December to 93.9 bcfd in January and 91.6 bcfd in February as wells in several producing regions froze, including the Permian in Texas and New Mexico, the Bakken in North Dakota and the Appalachia in Pennsylvania, West Virginia and Ohio.
On a daily basis, however, output soared to 95.0 bcfd on Thursday, its highest since Jan. 1, according to Refinitiv. Output has been rising almost daily since it dropped to 86.3 bcfd during a winter storm on Feb. 4, its lowest since February 2021.
With cold weather moderating, Refinitiv projected average U.S. gas demand, including exports, would drop from 129.5 bcfd this week to 120.6 bcfd next week. Those forecasts were lower than Refinitiv’s outlook on Thursday.
The amount of gas flowing to U.S. liquefied natural gas (LNG) export plants rose to an average of 12.5 bcfd so far in February, which would top January’s monthly record of 12.4 bcfd, as liquefaction trains at Venture Global LNG’s Calcasieu Pass plant in Louisiana enter service.
Venture Global got approval from federal regulators on Friday to load the first LNG vessel. A tanker arrived at Calcasieu on Monday and likely will take the plant’s first LNG cargo in coming days.
Traders said demand for U.S. LNG would remain strong so long as global gas prices keep trading well above U.S. futures as utilities around the world scramble for cargoes to meet surging demand in Asia and replenish low inventories in Europe – especially with the threat that Russia could invade Ukraine and cut gas supplies to Europe.
Russia provides 30%-40% of Europe’s gas supplies, totaling about 16.3 bcfd in 2021, according to analysts and U.S. energy data.