U.S. natural gas futures held near an 18-month low on Friday on forecasts for lower heating demand over the next two weeks than previously expected, which should allow utilities to keep pulling less gas from storage than usual for at least a third week in a row.
Also weighing on prices was a growing belief in the market that Freeport LNG’s liquefied natural gas (LNG) export plant in Texas would not return to service until February or later after another vessel turned away from the plant this week.
Freeport LNG, however, says the plant is on track to restart in the second half of January, pending regulatory approvals.
The market cares about Freeport because prices will likely jump once it returns to service as demand for gas rises. The facility, which shut due to a fire on June 8, can pull in around 2.1 billion cubic feet per day (bcfd) of gas and turn it into LNG when operating at full power. That is about 2% of U.S. daily production.
U.S. gas stockpiles are currently about 1% above the five-year (2018-2022) average for this time of year. Analysts expect that will rise to about 5% above normal after this week.
Analysts said many in the market now believe the United States has more than enough gas in storage for the rest of the winter, another factor weighing on prices.
Front-month gas futures for February delivery rose 0.7 cents, or 0.2%, to $3.282 per million British thermal units (mmBtu) by 9:00 a.m. EST (1400 GMT). On Thursday, the contract closed at its lowest since June 22, 2021, for a second day in a row.
For the week, the contract was down about 3%, putting it on track to decline for a fifth week in a row for the first time since late October. During those five weeks, the contract has lost about 50%.
The drop in gas prices coupled with recent increases in crude futures to a seven-week high has boosted oil’s premium over gas to its highest since March 2022. 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 25-to-1 on Friday. So far in 2023, crude has traded about 21 times over gas. That compares with crude’s average premium over gas of 15 times in 2022 and a five-year average (2018-2022) of 20 times. On an energy equivalent basis, oil should trade only six times over gas.
In another sign that a growing number of market participants have given up hope that extreme cold will bring massive price spikes later this winter, the premium on March futures over April, which the industry calls the widow maker, fell to a record low of one cent per mmBtu.
That puts the futures in danger of falling into contango, with future prices higher than earlier contracts. Analysts have said that March, the last month of winter when demand for heating fuel is high, should never trade below April, the first month of spring when demand is lower.
The industry calls the March-April spread the “widow maker” because rapid price moves resulting from changing weather forecasts have forced some speculators out of business. Among them was the Amaranth hedge fund, which lost more than $6 billion on gas futures in 2006.
With colder weather coming, Refinitiv forecast U.S. gas demand, including exports, would jump from 121.5 bcfd this week to 130.3 bcfd next week and 139.7 bcfd in two weeks. The forecasts for this week and next, however, were lower than Refinitiv’s outlook on Wednesday.