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Extended Warm Weather Curbing Demand

U.S. natural gas closed lower last week primarily due to an extended period of warmer-than-expected weather, leading to a significant reduction in heating fuel demand.

According to the latest data from the U.S. Energy Information Administration (EIA), there was a withdrawal of only 40 billion cubic feet (bcf) from natural gas storage for the week, markedly lower compared to the 72 bcf withdrawal during the same period last year and well below the five-year average of 93 bcf. With the weather forecast predicting continued above-average temperatures, the demand for heating fuel is expected to remain subdued, potentially causing further declines in natural gas prices.

Last week, Natural Gas Futures settled at $1.805, down $0.30 or -1.63%.

Weekly Natural Gas

Production Trends and Adjustments

The U.S. has seen a substantial reduction in natural gas production. Current data indicates that output in the Lower 48 states has declined to approximately 100.2 billion cubic feet per day (bcfd), a notable decrease from February’s average of 104.1 bcfd. This trend is largely a response to the ongoing drop in natural gas prices, prompting significant production cuts by major players in the industry.

Chesapeake Energy, soon to be the largest U.S. gas producer post-merger with Southwestern Energy, plans a drastic 30% reduction in its 2024 production. Similarly, EQT, the top natural gas producer currently, announced a curtailment of nearly 1 bcfd of production through March. These measures are indicative of a strategic industry response to align supply with the current market conditions, which are characterized by a significant surplus.

LNG Export Reductions

The natural gas market is also contending with challenges in the LNG export sector. The ongoing outage at the Freeport LNG facility in Texas has notably reduced the volume of gas flowing to LNG export plants. This has led to a decline in external demand for U.S. natural gas, exacerbating the oversupply situation domestically. The resumption of operations at the Freeport facility, expected potentially by mid-March, could provide some relief, but the timing remains uncertain.

Rig Count Declines Indicate Future Output Trends

The latest Baker Hughes report reveals a decrease in the number of operational oil and natural gas rigs, a critical indicator of future production levels. The total rig count has reduced to 622, the lowest in recent weeks, reflecting a 16.6% decrease from the same period last year. This decrease in drilling activity is a direct consequence of the downturn in natural gas prices, coupled with increased operational costs, signaling a more cautious approach from the industry.

Weekly Forecast

Given the current market conditions, including high storage levels, significant production cuts, and reduced LNG exports, the short-term outlook for the U.S. natural gas market remains bearish.

The combination of these factors is likely to keep exerting downward pressure on natural gas prices. In the coming week, barring any unexpected developments such as a dramatic shift in weather patterns or a sudden increase in LNG export capabilities, the market is poised to continue its downward trend. Stakeholders and traders in the natural gas market should be prepared for likely continued softening in prices, keeping a close watch on weather forecasts and LNG export developments for any signs of market change.

This article was originally posted on FX Empire

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