U.S. natural gas futures fell about 3% on Monday on rising supplies and forecasts for cooler weather and lower air conditioning demand over the next two weeks than previously expected.
Also weighing on gas prices was a 5% drop in oil futures and 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 stockpiles for next winter.
Freeport LNG, the second-biggest U.S. LNG export plant, was consuming about 2 billion cubic feet per day (bcfd) of gas before it was shut on June 8. Freeport expects the plant to return to at least partial service in early October.
Front-month gas futures fell 28.1 cents, or 3.2%, to $8.487 per million British thermal units (mmBtu) at 8:42 a.m. EDT (1242 GMT).
Recent declines in crude prices have cut oil’s premium over gas to its lowest since April 2020 when crude briefly turned negative. 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 10-to-1 on Monday. 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.
Last week, gas speculators boosted their net short futures and options positions on the New York Mercantile and Intercontinental Exchanges for a third week in a row to the most since March 2020, according to the U.S. Commodity Futures Trading Commission’s Commitments of Traders report.
So far this year, the gas front-month was up about 128% as higher prices in Europe and Asia keep demand for U.S. LNG exports strong. Global gas prices have soared this year following supply disruptions linked to Russia’s invasion of Ukraine on Feb. 24.
Gas was trading around $64 per mmBtu in Europe and $45 in Asia.
The United States became the world’s top LNG exporter during the first half of 2022. But no matter how high global gas prices rise, the United States cannot export more LNG because the country’s plants are already operating at full capacity.
Russian gas exports via 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 – have averaged 2.5 bcfd so far in August, down from 2.8 bcfd in July and 10.4 bcfd in August 2021.
U.S. gas futures lag far behind global prices because the United States is the world’s top producer with all the fuel it needs for domestic use, while capacity constraints and the Freeport outage prevent the country from exporting more LNG.
Data provider Refinitiv said average gas output in the U.S. Lower 48 states has risen to 97.6 bcfd so far in August from a record 96.7 bcfd in July.
With warmer weather expected, Refinitiv projected average U.S. gas demand, including exports, would rise from 96.3 bcfd this week to 96.9 bcfd next week. Those forecasts were lower than Refinitiv’s outlook on Friday.
The average amount of gas flowing to U.S. LNG export plants has risen to 11.0 bcfd so far in August from 10.9 bcfd in July. That compares with a monthly record of 12.9 bcfd in March. The seven big U.S. export plants can turn about 13.8 bcfd of gas into LNG.