Following one of the biggest plunges in the history of natural gas trading, futures rebounded on Wednesday as traders digested the impact of a major export outage against a broader backdrop of robust global demand.

At A Glance:

  • Traders focus on robust cooling demand
  • Europe’s thirst for U.S. LNG holds strong
  • Cash prices rebound as heat intensifies

After slumping $1.420 in Tuesday’s session in the wake of news that the liquefied natural gas (LNG) export project on Quintana Island, TX, Freeport LNG, won’t see a return to full service until late this year, the July Nymex gas futures contract on Wednesday regained 23.1 cents day/day and closed at $7.420. August rose 22.6 cents to $7.406.

Cash prices recovered from a slump of their own. NGI’s Spot Gas National Avg. gained 27.5 cents to $7.540 on Wednesday following a $1.370 loss a day earlier.

The Freeport outage, caused by an explosion and brief fire last week, translates into a loss of about 2.0 Bcf/d of LNG feed gas for at least three months, not three weeks, as initially telegraphed by the company. What’s more, with full service delayed until near the end of 2022, export volumes at the facility will likely remain below capacity at a time when global demand supports maximum volumes.

As such, feed gas that would have found its way to Freeport for export likely will now be used domestically, including for injections into storage. Other American LNG facilities are maxed already and cannot absorb more. That means low supplies in the United States relative to overall demand – as the summer nears – are bound to get a boost, helping to balance the market.

Easing Storage Concerns

Prices had skyrocketed to 14-year highs this spring on supply worries. The Freeport news and expected impact on storage eased those concerns and dragged prices down Tuesday. Prompt month prices plunged as low as $7.008 intraday.

The Schork Report’s analysts noted that, from peak to trough, Tuesday’s drop marked the seventh-largest decline on record. The settlement represented the third-largest day/day decline in Nymex records dating to 1990, they said.

“The second-largest exporter of U.S. LNG just went offline on the cusp of the peak cooling season,” the analysts said.

The Energy Information Administration (EIA) printed a 97 Bcf injection into Lower 48 storage during the week ended June 3. The build lifted stocks to 1,999 Bcf, but supplies in storage remained 14.5% below the five-year average.

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With an extended outage for the Freeport terminal, deficits are likely to shrink and the odds of summer natural gas prices surpassing the $10 mark have “materially lessened,” analysts at Tudor, Pickering, Holt & Co. (TPH) said.

Demand Strength

Still, demand drivers abound, convincing traders that Tuesday’s selloff was overdone and Wednesday’s slog back into positive territory was warranted.

June is forecast to be among the hottest on record. Cooling demand already is pervasive with highs in the 90s and above across large swaths of the Lower 48 in the first half of this month.

“Weather is always king in natural gas markets,” StoneX Financial Inc.’s Tom Saal, senior vice president of energy, told NGI. “Mother Nature is saying it’s going to be a really hot summer.”

Global demand, too, is mounting. Summer cooling needs are gaining momentum in Asia and Europe – both major destinations for U.S. LNG. Not including Freeport, peak U.S. LNG export rates have reached 12.7 Bcf/d this year, TPH estimated, essentially maxing out capacity.

While the “risk-reward for the summer months is clearly changed,” according to TPH, a continuation of recent hot weather trends could see prices “retrace some of the recent move as we trend through summer.” 

Additionally, Europe is clamoring for even more gas this year than normal. The continent is curbing its use of Russian gas in opposition to the Kremlin’s invasion of Ukraine. Countries throughout Europe see U.S. LNG as a key bridge to a new energy future.

With LNG supplies dented by the Freeport mishap, “the continent could be in for a winter season of sustained high prices as a result,” Rystad Energy analyst Zongqiang Luo said.

This could keep pressure on U.S. supplies, too, and provide price support for Nymex futures.

The market will have to wait until next week to see if the Freeport issues impact storage immediately. This week’s EIA inventory report, released Thursday, will cover the period ended June 10.

Surveys point to an injection in the low 90s for the Thursday print, which would keep stocks about 14% below the five-year average.

Bloomberg’s survey produced injection estimates that spanned 83 Bcf to 96 Bcf, with a median of 91 Bcf. A Wall Street Journal poll found an average injection expectation of 90 Bcf, and it also produced a range of 83 Bcf to 96 Bcf. Reuters’ poll landed at a median injection of 91 Bcf, with estimates ranging from 81 Bcf to 98 Bcf.

The estimates compare with an injection of 28 Bcf during the same week last year and a five-year average injection of 79 Bcf.

Cash Climbs Back

With cooling demand strong, spot gas prices regained momentum alongside futures on Wednesday.

Highs in the 90s baked parts of the Midwest – including Chicago – and most of the South on Wednesday. Brief interruptions aside, intense heat is expected to prove consistent through the second half of the month.

“We are now projecting the hottest June on record, per national gas-weighted degree days,” Bespoke Weather Services said Wednesday. This “is a key part of the big picture, as a continued hot pattern into the balance of summer” would “negate a significant chunk of what Freeport’s outage is giving back to storage.

“Because we are leaning toward the hotter ideas,” the firm added, Tuesday’s nosedive in futures and cash prices could “ultimately be shown an overreaction.”  

Next-day prices advanced in most regions Wednesday alongside cooling needs.

Algonquin Citygate near Boston jumped 54.5 cents day/day to average $7.445, while Chicago Citygate gained 34.5 cents to $7.415 and Malin in the Northwest advanced 63.0 cents to $7.000.

Exceptions included hubs in Southern California, where temperatures moderated in the high 70s Wednesday.

SoCal Citygate fell 69.0 cents to $7.590 and SoCal Border Avg. shed 63.0 cents to $7.395.

Looking ahead for the next seven days, National Weather Service (NWS) forecasts call for high pressure and lofty temperatures over much of the Plains, Midwest and Ohio Valley – as well as in the South.

Similar conditions are expected in the final week of June, with triple-digit highs driving robust demand across parts of the Southeast, Texas and the Southwest deserts.