US natural gas ease on mild weather, expected big US storage build

US natural gas futures eased on Wednesday on forecasts for continued mild weather over the next two weeks, which should allow utilities to put enough gas into storage for the winter heating season when demand for the fuel peaks.

Stockpiles were about 7% below normal for this time of year in the United States versus over 20% below normal in some European countries, according to analysts and government data.

US prices fell even though gas in Asia traded at fresh record highs and forecasts for more US demand over the next two weeks as warmer-than-usual weather in some parts of the country will cause some homes and businesses to keep using their air conditioners.

On their first day as the front month, gas futures for November delivery fell 8.7 cents, or 1.5%, to $5.793 per million British thermal units at 8:15 a.m. EDT (1215 GMT).

On Tuesday, when the October future was still the front-month, the contract closed at its highest level since February 2014 for a second day in a row as soaring global gas prices keep demand for US liquefied natural gas strong. The United States exports about 10% of the gas it produces as LNG.

Sharp price increases over the past few days pushed futures at-the-money implied volatility to 91.4%, its highest since February. In February, implied volatility, a determinant of an option's premium, soared to 115.1% during the Texas freeze, its second highest on record.

US natural gas futures rise on cooler weather, rising heating demand

Soaring gas prices this week also cut the premium of oil futures over gas to its lowest since November 2020. Over the last several years, that premium has prompted US energy firms to focus most of their drilling activity on finding more oil instead of gas because crude was the more valuable commodity.

The oil-to-gas ratio, or level at which oil trades compared with gas, fell to 12-to-1. So far in 2021, crude has traded about 20 times over gas. That compares with crude's average premium over gas of 19 times in 2020 and a five-year average (2015-2019) of 20 times. Crude, however, remains more valuable than gas. On an energy equivalent basis, oil should trade only six times over gas.

Data provider Refinitiv said gas output in the US Lower 48 states fell to an average of 90.9 billion cubic feet per day so far in September from 92.0 bcfd in August, due mostly to Hurricane Ida-related losses along the Gulf Coast. That compares with a monthly record of 95.4 bcfd in November 2019.

With the coming of seasonally cooler weather, Refinitiv projected that average US gas demand, including exports, would rise from 82.6 bcfd this week to 83.7 bcfd next week as homes and businesses start cranking up their heaters. Those forecasts were higher than Refinitiv expected on Tuesday.

With gas prices at or near record highs of around $28 per mmBtu in Europe and $29 in Asia versus just about $6 in the United States, traders said buyers around the world would keep purchasing all the LNG the United States could produce.

Despite reductions at several plants this month, the amount of gas flowing to US LNG export plants slipped modestly to an average of 10.3 bcfd so far in September from 10.5 bcfd in August, according to Refinitiv.

But no matter how high global prices rise, the United States only has the capacity to turn about 10.5 bcfd of gas into LNG. Global markets will have to wait until later this year to get more from the United States when the sixth liquefaction train at Cheniere Energy Inc's Sabine Pass and Venture Global LNG's Calcasieu Pass in Louisiana will likely start producing LNG in test mode.