US Natural Gas Futures Drop 5% on Explosion at Texas Freeport LNG Plant

(Reuters) — U.S. natural gas futures dropped about 5% on Wednesday on reports of a fire at the Freeport liquefied natural gas (LNG) export plant in Texas and early midday forecasts calling for less heat and demand over the next two weeks than previously expected.

Police in Quintana, Texas, said they were evacuating residents near the Freeport LNG plant following an explosion. The plant can turn about 2.1 billion cubic feet per day (Bcf/d) of natural gas into LNG. It was pulling in about 2.0 Bcf/d of pipeline gas earlier on Wednesday, according to data provider Refinitiv.

LNG exports were the fastest sources of demand growth in the United States. The possible loss of any facility would cut overall U.S. gas consumption and could boost global gas prices as countries around the world seek to reduce their dependence on Russian energy after Moscow's invasion of Ukraine.

Earlier in the day, the contract rose to a 13-year high on forecasts then for hotter weather and higher demand next week, a decline in output, low wind power, and record power demand in Texas.

Power demand in Texas broke the June record on Monday and Tuesday and is expected to keep rising this week until it tops the all-time high as economic growth boosts usage and hot weather causes homes and businesses to crank up their air conditioners.

Low wind power forces generators, including those in Texas - the state with the most wind power - to burn more gas to keep the lights on.

Front-month gas futures for July delivery fell 43.7 cents, or 4.7%, to $8.856 per million British thermal units (MMBtu) at 2:16 p.m. EDT (1816 GMT). In the minutes after the Freeport news broke, gas futures dropped by about 9%.

On Monday, the contract rose to its highest level since August 2008.

U.S. gas futures were still up about 128% so far this year as much higher prices in Europe and Asia keep demand for U.S. LNG exports strong, especially since Russia's Feb. 24 invasion of Ukraine stoked fears that Moscow might cut gas supplies to Europe.

Gas was trading around $25 per MMBtu in Europe and $23 in Asia.

Traders said U.S. futures also soared in recent months due to low U.S. gas stockpiles - about 15% below normal for this time of year - and high U.S. coal prices, which make it uneconomical for electric companies to switch from gas to coal for power generation.

Top Producer

U.S. futures lag far behind global prices because the United States is the world's top producer with all the gas it needs for domestic use, while capacity constraints inhibit additional LNG exports.

Data provider Refinitiv said average gas output in the U.S. Lower 48 states fell to 94.8 billion cubic feet per day (Bcf/d) so far in June from 95.1 Bcf/d in May. That compares with a monthly record of 96.1 Bcf/d in December 2021.

With hotter weather coming, Refinitiv projected average U.S. gas demand, including exports, would rise from 90.8 Bcf/d this week to 94.9 Bcf/d next week. The forecast for next week was higher than Refinitiv's outlook on Tuesday.

The average amount of gas flowing to U.S. LNG export plants rose to 12.8 Bcf/d so far in June from 12.5 Bcf/d in May. That compares with a monthly record of 12.9 Bcf/d in March. The United States can turn about 13.6 Bcf/d of gas into LNG.

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