Natural Gas Futures Jump over 15% on Output Drop, Colder Forecasts

(Reuters) — U.S. natural gas futures jumped over 15% on Wednesday as frigid weather cut output to its lowest level since July 2021 and on forecasts that cold will continue to chill much of the country until at least the middle of February.

In addition to extreme cold, near-record U.S. LNG exports continued to support U.S. gas prices as global LNG buyers look for ways to send more fuel to Western Europe in case Russia invades Ukraine and cuts off gas supplies to the rest of the continent.

Front-month gas futures for March delivery rose 71.7 cents, or 15.1%, to $5.468 per million British thermal units (MMBtu) at 11:24 a.m. EST (1624 GMT), putting the contract on track for its highest close since Jan. 27 when it soared 46% to its highest settle since December 2008.

In the spot market, frigid weather and high heating demand since the start of 2022 in the U.S. Northeast has kept next-day power and gas prices in New York and New England at or near their highest levels since January 2018.

Analysts forecast the extreme cold would force utilities to keep pulling massive amounts of gas from storage in coming weeks, causing total inventories to fall to over 6% below average for this time of year.

Output, meanwhile, which has been slow to return from freezes in January, dropped even further in February.

Data provider Refinitiv said output in the U.S. Lower 48 states fell to 92.0 Bcf/d so far this month, down from an average of 92.9 Bcf/d in January after wells in several regions froze, including the Permian in Texas and New Mexico, the Bakken in North Dakota, and the Appalachia in Pennsylvania, West Virginia and Ohio. Production hit an all-time monthly high of 97.3 Bcf/d in December 2021.

On a daily basis, preliminary data from Refinitiv showed output on Wednesday was on track to drop to 90.4 Bcf/d, which would be its lowest since July 2021.

With the weather expected to turn colder, Refinitiv projected average U.S. gas demand, including exports, would rise from 135.1 Bcf/d this week to 136.5 Bcf/d next week as homes and businesses crank up their heaters.

Those forecasts, however, were lower than Refinitiv's outlook on Tuesday.

The amount of gas flowing to U.S. LNG export plants has averaged 12.2 Bcf/d so far this month, down a little from a monthly record of 12.4 Bcf/d in January.

Traders said demand for U.S. LNG will remain strong so long as global gas price remain well above U.S. futures as utilities around the world scramble for LNG cargoes to replenish low stockpiles in Europe and meet surging demand in Asia.

In recent weeks, European gas prices have spiked on concerns Russia may cut off supplies due to the Russia-Ukraine tensions. Russia supplied Europe with about 16.8 bcfd of gas in 2020, representing about 35% to 40% of the continent's supply, according to analysts and U.S. energy data.

Gas prices were trading near $26 per MMBtu in Europe and $24 in Asia, compared with around $5 in the United States. But no matter how high global gas prices rise, the United States only has capacity to turn about 12.2 Bcf/d of gas into LNG. The rest of the gas flowing to LNG facilities is used to run plant equipment.

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