US Nat Gas Prices Could Plunge if LNG Exports Decline

Natural gas futures are inching lower after sliding the previous session on slowly rising output and a turn in the weather toward warmer than normal for this time of year, which should allow utilities to start injecting gas into storage next week – about a week earlier than usual.

At 01:46 GMT, May natural gas futures are trading $4.641, down $0.061 or -1.30%. On Monday, the United States Natural Gas Fund ETF (UNG) settled at $16.47, down $0.32 or -1.91%.

The market lost 1.34% on Monday following a big drop in oil and global gas prices, despite strong demand for U.S. liquefied natural gas (LNG). Global gas prices continued to trade around eight times over U.S. futures, keeping U.S. export demand at a record high.

Rising US Production Capping Gains

Data provider Refinitiv said average gas output in the U.S. Lower 48 states was on track to rise to 93.1 bcfd in March from 92.5 bcfd in February as more oil and gas wells return to service after freezing earlier in the year. That compares with a monthly record of 96.2 bcfd in December.

Demand Expected to Decline

Refinitiv also said average gas output in the U.S. Lower 48 states was on track to rise to 93.1 bcfd in March from 92.5 bcfd in February as more oil and gas wells return to service after freezing earlier in the year. That compares with a monthly record of 96.2 bcfd in December.

With the coming of milder spring weather, Refinitiv projected average U.S. gas demand, including exports, would drop from 112.0 bcfd this week to 97.3 bcfd next week. The forecast for next week was lower than Refinitiv’s outlook on Friday.

Russia, Volatile European Gas Futures and US LNG Imports

U.S. LNG exports have remained strong for months as global oil and gas prices traded at or near record highs – especially since Russia’s invasion of Ukraine on February 24 stoked global energy supply concerns. Russia is the world’s second-biggest gas producer behind the United States, Reuters reported.

But after European gas futures soared to an all-time high over $106 per million British thermal units (mmBtu) on March 7, traders got over their worries about supplies and started to take profits as gas flows from Russia stayed high and LNG imports poured in from around the world, according to Reuters.

Volatility for European futures was at an all-time high with prices down 16% so far on Monday. Last week, prices dropped by a record 35% after soaring by a record 122% in the prior week.

Before Russia’s invasion, the United States worked with other countries to ensure that gas supplies, mostly from LNG, would keep flowing to Europe. Russia usually provides around 30% to 40% of Europe’s gas, which totaled about 18.0 billion cubic feet per day (bcfd) in 2021, Reuters reported.

Short-Term Outlook

U.S. natural gas prices could weaken over the short-run with traders already pricing in higher production and lower demand. However, prices could get hit really hard if European demand for U.S. LNG drops.

At this time, U.S. gas futures are being mostly shielded from volatile global prices because the United States has all the fuel it needs for domestic use and the country’s ability to export more LNG is limited by capacity constraints.

The United States is already producing LNG near full capacity. So, no matter how high global gas prices rise, it would not be able to produce much more of the super cooled fuel anytime soon.

U.S. natural gas prices may not be rising on strong U.S. LNG exports, but they certainly can fall if exports decline.