U.S. natgas edges up as price look cheap after 8% drop in prior session

U.S. natural gas futures gained 2% on as an 8% drop in the prior session made prices seem relatively cheap with the winter heating season just around the corner. That small price increase came despite forecasts for milder-than-normal weather and lower-than-usual heating demand through early November.

"We feel that the first significant shift in the direction of colder temperature trends could be enough to trigger a sizable speculative short-covering rally that could ... trigger a 10-12% price advance," said Jim Ritterbusch, president of Ritterbusch and Associates in Galena, Illinois.

U.S. prices collapsed 8% on Monday despite an intraday spike of over 10% in Europe after Russian gas giant Gazprom failed to book much pipeline capacity to send additional fuel to Europe. Analysts said Russia seems to be waiting until Europe approves the Nord Stream 2 gas pipe to Germany before sending more fuel to Europe, leaving the continent dependent on other sources of gas - like U.S. LNG - to refill dangerously low stockpiles before the winter heating season.

In recent weeks, U.S. gas futures have mostly climbed in lockstep with global gas prices, which soared to record highs as utilities in Europe and Asia compete for LNG exports. But no matter how high global prices rise, U.S. LNG export plants were already operating near full capacity and will not be able to produce more LNG until later in the year. U.S. gas inventories, unlike those in Europe, were in good shape for the winter with more than enough fuel available for the upcoming heating season.

Analysts expect U.S. gas inventories will top 3.5 trillion cubic feet (tcf) by the start of the winter heating season in November, which they said would be a comfortable level even though it falls short of the 3.7 Tft³ five-year average. 

In Europe, analysts say stockpiles are about 15% below normal for this time of year. Front-month gas futures rose 9.9 cents, or 2.0%, to settle at $5.088 per MMBtu. On Monday, the contract closed at its lowest since Sept. 23. Data provider Refinitiv said gas output in the U.S. Lower 48 states rose to an average of 92.0 Bft³/d so far in October, up from 91.1 Bft³/d in September. That compares with a monthly record of 95.4 Bft³/d in November 2019.

The American Gas Association said the U.S. has about 3,368 Tft³ of technically recoverable gas resources - gas in the ground but not yet recovered. That is enough gas for over 100 years at the country's current rate of annual domestic consumption of about 30 Tft³.

Even though the weather is milder than normal, it is still turning seasonally cooler. Refinitiv projected average U.S. gas demand, including exports, would rise from 85.9 Bft³/d this week to 88.5 Bft³/d next week as more homes and businesses turn on their heaters. Those forecasts were lower than Refinitiv expected on Monday. With gas prices near $31 per MMBtu in Europe and $34 in Asia, versus just around $5 in the U.S., traders said buyers around the world will keep purchasing all the LNG the U.S. could produce. 

Refinitiv said the amount of gas flowing to U.S. LNG export plants averaged 10.4 Bft³/d  so far in October, the same as in September, but was expected to rise in coming weeks as more liquefaction trains exit maintenance outages. But the U.S. only has capacity to turn about 10.5 Bft³/d  of gas into LNG.

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