U.S. natgas posts second-biggest monthly drop ever, holds near 21-month low

A flare burns excess natural gas in the Permian Basin in Loving County, Texas
A flare burns excess natural gas in the Permian Basin in Loving County, Texas, U.S. November 23, 2019. Picture taken November 23, 2019. REUTERS/Angus Mordant/File Photo

Jan 31 (Reuters) - U.S. natural gas futures on Tuesday posted their second-biggest monthly drop ever, holding near a 21-month low, as a decline in output from extreme cold offset forecasts for warmer weather and less heating demand next week.

Gas prices have been depressed for weeks due in part to expectations that Freeport LNG's liquefied natural gas (LNG) export plant in Texas was still weeks away from pulling in big amounts of gas to produce LNG. Freeport on Tuesday asked federal regulators for permission to restart one of the plant's three liquefaction trains, which turn gas into LNG.

Output was on track to drop about 3.4 billion cubic feet per day (bcfd) over the past week or so to a preliminary one-month low of 95.8 bcfd as cold weather and winter storms froze oil and gas wells - known as freeze-offs in the energy industry - in several states, including Texas, Oklahoma, Colorado, North Dakota and Pennsylvania.

Despite this week's extreme cold, temperatures in the U.S. Lower 48 states have averaged about 42.2 degrees Fahrenheit (5.7 Celsius) so far in January, putting this month on track to be the warmest January since 2006 when the mercury averaged a record 42.8 F, according to data from Refinitiv and the federal government.

Front-month gas futures for March delivery rose 0.7 cents, or 0.3%, to settle at $2.684 per million British thermal units. On Monday, the contract closed at its lowest level since April 2021.

Despite the small increase, the contract remained in oversold territory with a relative strength index (RSI) below 30 for a second day in a row and the 15th time this year.

For the month, the front-month dropped about 40%, putting it on track for its second-biggest monthly loss on record after plunging by 42% in January 2001.

Meteorologists forecast temperatures across much of the U.S. Lower 48 states would remain mostly colder than normal through Feb. 4 before turning warmer than normal from Feb. 5 through at least Feb. 15.

With milder weather coming, Refinitiv forecast U.S. gas demand, including exports, would drop from 134.5 bcfd this week to 128.8 bcfd next week. The forecast for this week was higher than Refinitiv's outlook on Monday, while its forecast for next week was lower.

That should allow utilities to continue pulling less gas from storage for a fourth or fifth week in a row.

The biggest wild card in the gas market remains when Freeport's export plant will exit a seven-month outage caused by a fire in June 2022.

Freeport is the second-biggest U.S. LNG export plant, and traders expect prices to rise once it starts pulling in big amounts of gas, boosting demand for the fuel. The plant can pull in about 2.1 bcfd of gas daily, about 2% of what U.S. gas producers take from the ground.

Freeport has been pulling in small amounts of gas since Jan. 26 when federal regulators approved the company's plan to start cooling down parts of the plant.

Several analysts have said they do not expect Freeport to start producing LNG until mid-February, March or later.

Some vessels have turned away from Freeport in recent weeks, possibly including Corcovado LNG over the past 24 hours, which seems to be heading for another port.

But several tankers were still waiting in the Gulf of Mexico to pick up LNG from the plant, including Prism Courage (since around Nov. 4), Prism Agility (Jan. 2), Prism Brilliance (Jan. 26) and Kmarin Diamond (Jan. 26).

Reporting by Scott DiSavino; Editing by Paul Simao

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