U.S. Natural Gas Prices Drop to One-Week Low Amid Talk of Freeport LNG Reduction

(Reuters) - U.S. natural gas futures fell about 6% on Wednesday to a one-week low in volatile contract expiration trade, pressured by an expected decline in gas flows to liquefied natural gas (LNG) export plants. 

Traders said Freeport LNG in Texas might reduce output and they pointed to forecasts for less demand this week than previously expected.

On its last day as the front-month, gas futures for June delivery on the New York Mercantile Exchange (NYMEX) fell 19.4 cents, or 5.7%, to settle at $3.214 per MMBtu, their lowest close since May 19.

The contract's price was highly volatile, up as much as 3% and down as much as 7% during the session. Traders cited low volumes on expiration day for the June contract. The market only traded about 2,400 front-month contracts on the NYMEX, far below the year-to-date daily average of roughly 165,000.

Futures for July, which will soon be the front-month, were down about 4.6% to $3.57 per MMBtu.

Next-day prices at the U.S. Henry Hub benchmark <NG-W-HH-SNL> in Louisiana traded around $3.20 per MMBtu. Low next-day Henry Hub prices have kept pressure on futures in recent weeks with spot contracts trading below front-month futures every day since late April.

Analysts have said that so long as spot prices remain far enough below front-month futures <NGc1> to cover margin and storage costs, traders should be able to lock in arbitrage profits by buying spot gas, storing it and selling a futures contract.

Supply and Demand

Financial firm LSEG said average gas output in the Lower 48 U.S. states fell to 105.0 billion cubic feet per day so far in May, down from a monthly record of 105.8 bcfd in April.

On a daily basis, output was on track to drop to a preliminary two-month low of 103.7 bcfd on Wednesday, down from 105.4 bcfd on Tuesday. Analysts have said preliminary data is often revised later in the day.

Energy traders said output reductions this month were primarily due to normal spring maintenance on gas pipes, including U.S. energy firm Kinder Morgan's 2.7-bcfd Permian Highway from the Permian basin in West Texas to the Texas Gulf Coast. Kinder Morgan said it exchanged a turbine at the Big Lake compressor station from May 13-26.

Energy firms usually work on gas pipes when demand is low in the spring and autumn.

LSEG forecast average gas demand in the Lower 48, including exports, will slide from 96.1 bcfd this week to 95.7 bcfd next week. The forecast for this week was lower than LSEG's outlook on Tuesday, while its forecast for next week was higher.

The average amount of gas flowing to the eight big LNG export plants operating in the U.S. fell to 15.1 bcfd so far in May, down from a monthly record of 16.0 bcfd in April.

The LNG feedgas decline this month was mostly due to maintenance at Cameron LNG's 2.0-bcfd plant in Louisiana, Cheniere Energy's 3.9-bcfd Corpus Christi under construction and in operation in Texas and Cheniere's 4.5-bcfd Sabine Pass in Louisiana, and a few brief unplanned reductions at Freeport LNG's 2.1-bcfd plant in Texas, including most recently on May 28.

Looking ahead, energy traders said they expect LNG feedgas to remain below April's record high in June with Cheniere planning about three weeks of maintenance on a couple of liquefaction trains at Sabine around June 2-23.

 

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