Natural Gas Forecast: Largest Reduction in Gas Rig Count in Seven Years Sparks Market Attention

Natural Gas Highlights

• Gas rig count sees largest reduction in seven years
• Despite record gas output, prices remain relatively unchanged
• Weather patterns shift and gas flows to LNG plants decline

Natural Gas Overview

U.S. natural gas futures experienced a notable 4% increase on Friday, driven by concerns that future output could decline.

Natural Gas settled at $2.186, up $0.096 or +4.59%. The United States Natural Gas Fund ETF (UNG) finished at $6.65, up $0.26 or +3.99%.

Record Reduction in Gas Rig Count

Energy companies made significant cuts to the number of rigs drilling for gas this week, marking the largest reduction in seven years. According to Baker Hughes Co, the gas rig count, which serves as an early indicator of future output, dropped by 16 to 141 during the week ending May 12, reaching its lowest level since April 2022. This decline in the gas rig count was the most substantial since February 2016.

Steady Gas Prices Despite Record Output

Despite record U.S. gas output, rising exports from Canada, and forecasts of mild weather that would result in low demand and increased storage injections, gas prices remained relatively unchanged prior to the release of Baker Hughes’ report.

Stable Gas Supply from US and Canada

In terms of supply, Refinitiv reported that average gas output in the U.S. Lower 48 states held steady at 101.4 billion cubic feet per day (bcfd) in May, matching the monthly record high observed in April. Gas flows from Canada to the U.S. were expected to remain stable at 7.6 bcfd for the third consecutive day, recovering from a recent low of 6.7 bcfd due to wildfires in Alberta that led to production shutdowns and pipeline disruptions. Canada has been exporting an average of 8.5 bcfd of gas to the United States since the beginning of the year.

Weather Shifts to Impact US Gas Demand

Meteorologists predicted a shift in weather patterns for the U.S. Lower 48 states, transitioning from warmer-than-normal conditions from May 12-17 to near-normal levels from May 18-27. Refinitiv’s forecast indicated that U.S. gas demand, including exports, would increase from 91.2 bcfd to 91.9 bcfd in the following week as air conditioners are turned on, and then decrease to 90.1 bcfd in two weeks as the weather becomes milder.

Decline in Gas Flows to US LNG Export Plants

Gas flows to the major U.S. LNG export plants have declined to an average of 13.1 bcfd in May from a record high of 14.0 bcfd in April. Reductions at Cameron LNG’s terminal in Louisiana and Cheniere Energy Inc’s Sabine Pass in Louisiana primarily contributed to this decrease. It is worth noting that last month’s record flows surpassed the capacity of the seven LNG plants, which can convert 13.8 bcfd of gas into LNG, as some of the fuel is utilized to power equipment involved in the LNG production process.

Technical Analysis

Natural gas closed on the bullish side of the daily pivot at $2.1680, putting the market in a position to exend the rally on Monday. If the move continues to generate enough upside momentum then look for a possible near-term test of $2.638 (R2).

Look for the downside bias to resume on a sustained move under $2.168 with $1.962 (S1) the primary target.