Natural Gas News: Can Lower Output and Strong LNG Demand Sustain High Prices?

Market Overview

Natural gas futures closed lower on Friday but marked a strong week overall, buoyed by decreasing production levels and robust demand linked to liquefied natural gas (LNG) exports. This positive momentum allowed natural gas to secure gains for the second consecutive week, a feat last achieved in early March. The U.S. natural gas market remains resilient, holding near a 9-week high as demand forecasts rise and production output shows signs of slowing.

Last week, Natural Gas settled at $2.252, up $0.110 or +5.14%.

Supply Constraints and Demand Trends

A significant driver of the current bullish sentiment in natural gas markets is the decline in domestic production. Notably, top producers like EQT and Chesapeake Energy have postponed well completions and reduced drilling activities in response to the price drops experienced earlier this year. This reduction in activity contributes to an approximately 9% drop in production so far in 2024. Additionally, the return to near full service of the Freeport LNG plant in Texas has elevated gas flows to LNG export facilities, further tightening supply.

Storage and Production Trends

Despite these bullish factors, the market faces pressure from a substantial oversupply in storage, with current levels approximately 31% above the norm for this time of year. The latest EIA report indicates that natural gas storage saw a build of 79 billion cubic feet (Bcf), less than the anticipated 87 Bcf, which has provided some support to prices. However, the elevated storage levels continue to loom over the market, potentially capping further price increases.

Drilling Activity and Future Output

Recent trends in drilling activity also provide insight into future production dynamics. The Baker Hughes report revealed a decline in the number of active drilling rigs, with natural gas rigs slightly increasing to 103, despite a general downtrend. This reduction in rigs is an early indicator of future output levels and reflects the industry’s cautious approach amid fluctuating prices and demand.

Short-Term Forecast

Looking ahead, the market is expected to remain bullish in the short term. The decrease in production, combined with robust LNG export demand and the strategic management of supply by major producers, is likely to support higher price levels. However, the substantial gas storage volumes pose a risk of price suppression if not balanced by sustained high demand or further cuts in production. Traders should watch for changes in weather patterns and LNG export levels, which will play crucial roles in shaping market conditions in the upcoming weeks.