U.S. natural gas futures fell about 3% to a three-week low on Monday on forecasts for lower demand next week than previously expected.
Energy analysts also noted the tremendous oversupply of gas still in storage has kept a lid on gas prices all year.
There was still about 12% more gas in storage than normal for this time of year even though weekly builds, including a rare decline during one week in August, have been smaller than normal in 13 of the past 14 weeks.
That price decline occurred despite forecasts for hotter-than-normal weather over the next two weeks that should prompt power generators to burn more gas than usual to keep air conditioners humming into mid-September.
Front-month gas futures for September delivery on the New York Mercantile Exchange fell 6.6 cents, or 3.3%, to settle at $1.956 per million British thermal units (mmBtu), their lowest close since Aug. 5.
That also put the contract down for a fifth day in a row for the first time since late July. The front-month fell about 13% during those five days.
Those declines boosted the premium of futures for October over September to 17 cents per mmBtu, a record high for a second day in a row.
In the spot market, pipeline constraints caused next-day gas prices at the Waha hub in the Permian Shale in West Texas to average in negative territory again for a record 29th time this year.
SUPPLY AND DEMAND
Producers increase and decrease output in reaction to prices, but it usually takes a few months for changes in drilling activity to show up in the production data.
Average monthly spot prices at the U.S. Henry Hub benchmark in Louisiana hit a 12-month high of $3.18 per mmBtu in January before dropping to a 44-month low of $1.72 in February and a 32-year low of $1.49 in March, according to Reuters and federal energy data.
In reaction to that price plunge, producers cut average monthly output from 106.0 billion cubic feet per day (bcfd) in February to 102.7 bcfd in March, 101.5 bcfd in April, and a 17-month low of 101.3 bcfd in May, according to federal energy data.
Winter storms at the start of the year caused output to fall from a record 106.3 bcfd in December to 103.6 bcfd in January.
As monthly Henry Hub spot prices increased to $1.60 per mmBtu in April, $2.12 in May, and $2.54 in June, some producers, including EQT and Chesapeake Energy, started to increase drilling activities, boosting output to 101.0 bcfd in June and 103.4 bcfd in July.
But with average spot Henry Hub prices back down to $2.08 per mmBtu in July and $2.00 so far in August, analysts said output would likely decline as some producers reduce drilling activities again.
Financial firm LSEG said gas output in the U.S. Lower 48 U.S. states has slid to an average of 102.4 bcfd so far in August, down from 103.4 bcfd in July.
LSEG forecast average gas demand in the Lower 48, including exports, will slide from 105.2 bcfd this week to 102.8 bcfd next week. The forecast for this week was higher than LSEG’s outlook on Friday, while its forecast for next week was lower.
(Reporting by Scott DiSavino in New York; Editing by Paul Simao and Matthew Lewis)