US natgas prices fall 4% on rising output, less heat forecast for next week

U.S. natural gas futures slid about 4% on Wednesday on rising output and forecasts for less hot weather and lower gas demand next week than previously expected.

The price decline came despite forecasts for record-breaking heat later this week that could boost the amount of gas power generators burn to an all-time high.

Front-month gas futures NG1! for September delivery on the New York Mercantile Exchange fell 9.0 cents, or 4.2%, to settle at $2.036 per million British thermal units (mmBtu).

For the month, the contract was down about 22% after gaining about 48% during the prior three months.

In the spot market, gas prices at the Waha hub (NG-WAH-WTX-SNL) in the West Texas Permian Shale turned negative for a third time in July, even as a record-breaking heat wave could boost U.S. power demand to an all-time high as homes and businesses crank up air conditioners.

In the Pennsylvania-New Jersey-Maryland region, next-day power at the PJM West hub (EL-PK-PJMW-SNL) fell to $14 per megawatt hour, its lowest since April 2021.

Analysts said higher gas use by power generators could cause utilities to take the unusual step of pulling gas out of storage during the second week of August. That would be the first weekly storage withdrawal in August since 2006.

There was currently about 16% more gas in storage than normal for this time of year.

Storage builds have been mostly smaller than usual in recent weeks, because several producers cut output earlier this year after futures prices dropped to 3-1/2-year lows in February and March.

Higher prices in April and May, however, prompted some drillers, including EQT EQT and Chesapeake Energy CCHK, to slowly boost output.

But with prices down about 20% so far in July, some analysts think producers could decide to keep their drilling activities on hold for longer.

In other news, the U.S. National Hurricane Center said a tropical disturbance in the Atlantic Ocean has a 60% chance of strengthening into a cyclone that could hit the U.S. East Coast somewhere between Florida and South Carolina over the next seven days.

Analysts said an East Coast storm could reduce gas demand by cutting power use through outages and cooler weather.

SUPPLY AND DEMAND

Financial firm LSEG said gas output in the Lower 48 states rose to an average of 102.5 billion cubic feet per day (bcfd) so far in July, up from 100.2 bcfd in June and a 17-month low of 99.4 bcfd in May. U.S. output hit a monthly record of 105.5 bcfd in December 2023.

Meteorologists forecast temperatures across the Lower 48 states will average 83.5 degrees Fahrenheit (28.6 Celsius) on Aug. 1 and 83.9 F on Aug. 2, according to LSEG data.

That would top the daily record high average temperature of 83.0 F set on July 20, 2022, when power demand peaked at an all-time high of 742,600 megawatts, LSEG and federal energy data showed.

To keep air conditioners humming during that record heat, LSEG forecast power generators would burn about 54.8 bcfd of gas on Aug. 2, which would top the all-time high of 54.1 bcfd reached on July 9 when generators had to burn more gas due to a lack of wind power.

But the amount of wind power was on track to rise from 4% last week to around 10% this week.

With more heat coming, LSEG forecast average gas demand in the Lower 48, including exports, will rise from 105.3 bcfd this week to 110.7 bcfd next week. The forecast for next week was lower than LSEG's outlook on Tuesday.