U.S. Gas Futures Jump to 9-Week High as Output Slides

(Reuters) — U.S. natural gas futures jumped over 6% to a nine-week high on Wednesday on expectations gas production will decline in coming weeks as drillers shut oil wells in shale basins due to the recent collapse of U.S. crude prices.

Those oil wells produce a lot of gas.

Front-month gas futures for May delivery on the New York Mercantile Exchange rose 11.8 cents, or 6.5%, to settle at $1.939 per million British thermal units.

U.S. crude futures, meanwhile, were on track to fall for a third week in a row as government lockdowns to slow the spread of coronavirus cut global demand for oil. That puts the U.S. contract down over 50% during that time.

Looking ahead, however, gas futures for the balance of 2020 and calendar 2021were trading much higher than the front-month on expectations demand will jump as the economy snaps back once governments loosen travel and work restrictions. Calendar 2021 has traded over 2022 for 30 days in a row and over 2025 for 20 days. 

Gas output in the U.S. Lower 48 states dropped to a four-week low of 92.3 billion cubic feet per day (bcfd) on Tuesday from 93.1 bcfd on Monday, according to data firm Refinitiv.

In the long term, the U.S. Energy Information Administration (EIA) projected coronavirus lockdowns will cut U.S. gas demand - not including exports - to an average of 83.79 bcfd in 2020 and 81.24 bcfd in 2021 from a record 84.97 bcfd in 2019. If correct, that would be the first annual decline in consumption since 2017 and the first time demand falls for two consecutive years since 2006.

The EIA expects U.S. liquefied natural gas (LNG) and pipeline exports will still hit fresh records in coming years as more LNG export plants and pipelines to Mexico enter service. The pace of that export growth, however, has slowed from what the agency expected before the pandemic.

The EIA projected LNG exports would rise from a record 5.0 bcfd in 2019 to 7.0 bcfd in 2020 and 7.7 bcfd in 2021, while pipeline exports will rise from a record 7.8 bcfd in 2019 to 8.4 bcfd in 2020 and 8.6 bcfd in 2021.

In the short term with the coming of milder weather, data provider Refinitiv projected gas demand in the Lower 48 states, including exports, would fall from 93.5 bcfd this week to 88.9 bcfd next week as the weather turns milder.

U.S. pipeline exports have dropped to a 30-day average of 2.4 bcfd to Canada and 4.9 bcfd to Mexico due to mild weather so far this year and coronavirus-related demand destruction, according to Refinitiv, down from around 3.5 bcfd to Canada and 5.9 bcfd to Mexico in January.

The amount of gas flowing to U.S. LNG export terminals, meanwhile, fell to a five-week low of 7.7 bcfd on Tuesday from 8.1 bcfd on Monday, according to Refinitiv.

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