U.S. natural gas gain over 2pc after smaller-than-expected storage build

U.S. natural gas futures climbed more than 2pc on Thursday after a federal report showed last week's storage build was much smaller than expected, as demand for cooling remained high and LNG exports to Mexico soared.

Front-month gas futures for August delivery on the New York Mercantile Exchange rose 9.2 cents by 2:49 p.m. EDT to settle 2.6pc higher at $3.688 per million British thermal units.

The U.S. Energy Information Administration (EIA) said U.S. utilities added 16 billion cubic feet (bcf) of gas into storage during the week ended July 2.

That was less than the 34-bcf build analysts forecast in a Reuters poll and compares with a build of 57 bcf during the same week a year ago and a five-year (2016-2020) average injection of 63 bcf.

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Last week's storage injection brought stockpiles up to 2.574 trillion cubic feet (tcf), 6.8pc below the five-year average for the period and 17.6pc below the same week a year ago.

"We do seem to have a tighter gas market this year, driven mainly by an expected increase in demand as we recover from the pandemic and record breaking exports to Mexico," said Zhen Zhu, economist at Oklahoma City-based C.H. Guernsey.

Data provider Refinitiv projected average gas demand, including exports, would rise from 89.9 bcfd this week to 92.7 bcfd next week.

Marshall Steeves, energy markets analyst at IHS Markit, said that while the United States was moving into its highest demand period for air conditioning use, gas production could also increase along with oil production, acting as a "bulwark" against higher prices.

There could be tightness in the market for a few weeks, but demand should recede toward the end of August while gas production ticks up, reversing the tightness, Steeves added.

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On Wednesday, the EIA projected an increase in U.S. natural gas production in 2021 in its Short Term Energy Outlook (STEO).

The EIA said dry gas production could rise to 96.99 bcfd in 2021 from 95.81 bcfd in 2020 before rising to 99.63 bcfd in 2022.

Refinitiv said gas output in the Lower 48 U.S. states averaged 90.8 billion cubic feet per day (bcfd) so far in July.

That compares with an average of 92.2 bcfd in June and an all-time high of 95.4 bcfd in November 2019.

The amount of gas flowing to U.S. liquefied natural gas (LNG) export plants averaged 11 bcfd so far in July, up from 10.1 bcfd in June, but still below April's record 11.5 bcfd.

U.S. pipeline exports to Mexico averaged 6.4 bcfd so far in July, down from a record 6.7 bcfd in June.