U.S. natural gas futures dropped about 6% on Thursday on a possible deal that would avoid a rail strike, after soaring 10% in the prior session on worries such a strike would boost demand for gas by threatening coal supplies to power plants.
Coal fuels about 20% of U.S. power generation. About two-thirds of the nation’s coal-fired power plants receive their coal by rail. When coal or any other fuel is not available for power generation, energy firms usually burn more gas to produce power. Gas already provides about 37% of U.S. electricity.
U.S. railway parties have agreed to a cooling off period as a standard part of the ratification process after reaching a tentative deal overnight, a move that would avert any shutdown in case unions fail to ratify it, according to a source familiar with the situation.
The drop in gas prices came despite a jump in global gas prices and a federal report expected to show last week’s storage build was smaller than usual because power generators had to burn lots of gas to keep air conditioners humming during a heat wave.
Analysts forecast U.S. utilities added 73 billion cubic feet (bcf) of gas to storage during the week ended Sept. 9. That compares with an increase of 78 bcf in the same week last year and a five-year (2017-2021) average increase of 82 bcf.
If correct, last week’s increase would boost stockpiles to 2.767 trillion cubic feet (tcf), or 12.5% below the five-year average of 3.125 tcf for this time of the year.
In addition to the rail deal, the drop in gas prices also came on expectations output would reach a monthly record in September and demand would decline when the Cove Point liquefied natural gas (LNG) plant in Maryland shuts for a couple weeks of maintenance in October.
U.S. gas demand has already been reduced for months by the ongoing outage at the Freeport LNG export plant in Texas has left more gas in the United States for utilities to inject into stockpiles for next winter.
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 expects the facility to return to at least partial service in early to mid-November.
Front-month gas futures fell 52 cents, or 5.7%, to $8.594 per million British thermal units at 8:18 a.m. EDT (1218 GMT). In what has already been an extremely volatile year, that drop would only be its biggest one-day percentage decline since early September.
On Wednesday, the contract jumped over 10% to settle at its highest since Sept. 1. That was its biggest daily percentage gain since late July.
So far this year, gas futures were up about 130% as higher prices in Europe and Asia keep demand for U.S. LNG exports strong. Global gas prices have soared due to supply disruptions and sanctions linked to Russia’s Feb. 24 invasion of Ukraine.
Gas was trading around $67 per mmBtu in Europe and $53 in Asia. That was a 5% jump for European prices.
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 just 1.3 bcfd so far in September, down from 2.5 bcfd in August and 10.8 bcfd in September 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 prevents the country from exporting more LNG.
Data provider Refinitiv said average gas output in the U.S. Lower 48 states rose to 99.0 bcfd so far in September from a record 98.0 bcfd in August.