What Caused the Drop in Natural Gas Prices?
There are several factors that have contributed to the fall in natural gas prices this week. Some of them are:
Mild weather forecasts: The weather outlook for the next two weeks shows above-normal temperatures across most of the US, reducing the demand for heating and cooling. According to the US Energy Information Administration (EIA), the average total degree days (a measure of heating and cooling demand) for April 23-29 were 13% lower than normal, and 18% lower than last year.
High storage levels: The EIA reported that natural gas inventories increased by 15 billion cubic feet (Bcf) for the week ending April 23, slightly above the market expectations of 14 Bcf. The total working gas in storage was 1,898 Bcf, which is 14% lower than last year, but 1% higher than the five-year average.
Low liquefied natural gas (LNG) exports: The EIA estimated that LNG exports averaged 10.3 Bcf per day for the week ending April 28, down from 11.2 Bcf per day in the previous week. The decline was mainly due to lower demand from Asia and Europe, where spot prices have fallen below $7 per MMBtu.
Rising production: The EIA projected that natural gas production will average 92.6 Bcf per day in April, up from 91.8 Bcf per day in March. The increase is driven by higher output from the Permian Basin and the Haynesville Shale, where rig counts have risen in recent months.
What are the Prospects for Natural Gas Prices?
The outlook for natural gas prices depends largely on how the supply-demand balance evolves in the coming months. Some of the factors that could influence the market are:
Summer cooling demand: As the weather gets warmer, the demand for electricity generation and air conditioning will increase, boosting the consumption of natural gas. The EIA expects natural gas-fired power plants to account for 40% of US electricity generation this summer, up from 37% last summer.
LNG exports: The EIA forecasts that LNG exports will average 9.5 Bcf per day in 2023, up from 6.5 Bcf per day in 2022, as new liquefaction facilities come online and global demand recovers from the pandemic. LNG exports provide an outlet for US natural gas production and support higher prices.
Production trends: The EIA anticipates that natural gas production will average 92.4 Bcf per day in 2023, down from 93.1 Bcf per day in 2022, as low prices discourage drilling activity and reduce associated gas from oil wells. However, production could rebound if prices rise enough to incentivize more investment.
The Bottom Line
Natural gas prices have fallen this week due to mild weather, high storage levels, low LNG exports and rising production. The near-term outlook remains bearish unless there is a significant shift in the supply-demand balance. The next support level to watch is $2.00 per MMBtu, which has not been tested since February.
