Natural Gas Prices Decline Amidst Strong Production and Market Concerns
Natural gas prices experienced a notable drop in early May, hitting their lowest point in seven weeks. The market closed down by 4.74% due to various factors amid a backdrop of heightened global economic uncertainty. Concerns about a trade war contributed to a bearish sentiment in asset markets, adversely impacting natural gas prices. In addition, an uptick in U.S. natural gas production, which rose by 5.1% year-on-year, added to the downward pressure on prices.
In March, prices surged to a two-year high due to the anticipation of tight natural gas storage levels ahead of the summer air-conditioning demand. BloombergNEF has indicated that U.S. gas storage this summer could be approximately 10% below the five-year average.
Recent data shows that natural gas production across the Lower 48 states reached 107.2 billion cubic feet per day (bcf/day) as of recent reports, reflecting a 5.1% yearly increase. In contrast, demand in the same regions climbed to 79.9 bcf/day, marking a 10% rise year-on-year. Additionally, net flows of liquefied natural gas (LNG) to U.S. export terminals also saw an uptick, currently averaging 15.9 bcf/day, which is up 1.7% week-over-week.
An increase in electricity output in the United States is another factor bolstering natural gas demand from utility companies. According to the Edison Electric Institute, total electricity output in the Lower 48 states for the week ending March 22 witnessed a year-on-year increase of 0.9%, totaling 72,289 gigawatt-hours (GWh). Over a 52-week span, the electricity output also increased by 3.55%, reaching about 4,239,323 GWh.
A significant long-term aspect supporting natural gas prices includes recent policy changes. In January, President Trump reinstated the approval process for gas export projects that had been paused by the Biden administration. This decision potentially paves the way for around a dozen LNG export projects that were previously held up. The increased capacity for LNG exports is likely to enhance demand for U.S. natural gas, positively influencing price movements.
However, there was an unfavorable turn for natural gas prices with the latest report from the Energy Information Administration (EIA). The report revealed an increase in natural gas inventories by 29 bcf for the week ending March 28, exceeding expectations and contrasting sharply with the five-year average draw of 13 bcf for this period. Current inventory levels are down 21.5% year-on-year and 4.3% below the five-year seasonal average, indicating a tight supply situation in the market. In Europe, gas storage levels were reported to be at 34% capacity as of April 1, compared to the five-year average of 45% for this time frame.
Drilling activity in the U.S. has also seen a decline. Baker Hughes reported a decrease in the number of active natural gas drilling rigs by seven, bringing the total to 96, the lowest in six and a half months. This marks a significant drop from the 166 rigs reported in September 2022, a five-and-a-quarter-year high, and a stark contrast to the pandemic-era low of 68 rigs recorded in July 2020.
The current landscape of the natural gas market reflects a complex interplay of increased production, fluctuating demand, and shifting policy environments. As prices remain influenced by international economic factors and domestic energy policies, the overall market sentiment continues to evolve, posing both opportunities and challenges for stakeholders involved in the natural gas sector.
