US natural gas drops over 7% as output rises, extreme volatility continues

US natural gas futures dropped over 7% after soaring to a 12-year high in the prior session as US output starts to increase and a period of extreme volatility for energy prices around the world continues.

Since the middle of August, global gas prices have repeatedly hit record highs as worries Europe may not have enough gas in storage for the winter and insatiable demand for the fuel in Asia caused utilities around the world to compete for available LNG cargoes.

Front-month gas futures on the New York Mercantile Exchange fell 49.3 cents, or 7.8%, to $5.819 per million British thermal units (mmBtu) at 10:08 a.m. On Tuesday, the contract closed at its highest since December 2008.

Weeks of rapid changes in US gas futures boosted implied volatility on the NYMEX, used as a determinant of an option's premium, to an all-time high on Tuesday.

US natural gas jumps 6% on higher demand, soaring global prices

Analysts have said gas stockpiles in some European countries were more than 20% below normal for this time of year. In the United States, meanwhile, inventories were expected to reach about 3.5 trillion cubic feet (tcf) by the end of October. Analysts said that should be enough for the US winter heating season even though that amount would fall short of the 3.7 tcf five-year (2016-2020) average for that time of year.

Belief that the United States will have enough gas in storage for this winter and a lack of capacity to produce more LNG for export has kept US prices from rocketing to the record levels seen in Europe and Asia. However, pipeline constraints and competition for expensive LNG were expected to boost prices to multi-year highs in California and New England this winter.

Data provider Refinitiv said gas output in the US Lower 48 states rose to an average of 91.8 billion cubic feet per day (bcfd) so far in October from 91.1 bcfd in September. That compares with a monthly record of 95.4 bcfd in November 2019.

Refinitiv projected that US gas demand, including exports, would slide from an average of 85.7 bcfd this week to 84.0 bcfd next week as the weather turns milder. Those forecasts were higher than Refinitiv expected on Tuesday.

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With gas prices at or near record highs of $46 per mmBtu in Europe and $35 in Asia, versus just over $6 in the United States, traders said buyers around the world would keep purchasing all the LNG the United States could produce.

Data provider Refinitiv said the amount of gas flowing to US LNG export plants slipped from an average of 10.4 bcfd in September to 10.0 bcfd so far in October with short-term upsets at a few Gulf Coast plants and Berkshire Hathaway Energy's Cove Point LNG export plant in Maryland expected to remain shut for another week of planned maintenance.

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 are expected to start producing LNG in test mode.