Natural-gas futures dropped by more than 13% on Tuesday, eyeing their lowest settlement in five weeks, as a delay in full repairs to a damaged U.S. liquified natural gas terminal is expected to lead to higher inventories of the commodity in U.S. storage.
Freeport LNG Development said Tuesday that it expects a resumption of partial operations at its liquefactions plant on Quintana Island on Texas’s Gulf coast in about 90 days following damage in the wake of an explosion and fire on June 8. However, repairs and full plant operations are not expected until late 2022.
“Ultimately, the loss of natural-gas export business from Freeport’s terminal is being interpreted as a bearish supply driven event as futures prices fall,” said Walter Kunisch, Jr., senior commodity markets strategist at Hilltop Securities Inc. Still, if this event translates to lower power prices, we would view this a win for the beleaguered and inflationary fatigued consumer.”
Natural gas for July delivery NGN22, -13.99% fell by $1.152, or 13.4%, at $7.457 per million British thermal units in Tuesday dealings, after trading as low as $7.008. Based on the front-month contract, prices look to finish at their lowest since May 10, FactSet data show.
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Since the Freeport LNG terminal is responsible for export of 15% to 20% of total U.S. liquified natural-gas exports, “the outage is a monstrous event,” Manish Raj, chief financial officer at Velandera Energy Partners, told MarketWatch.
The delay of full repairs to the facility means that an additional two billion cubic feet of natural gas per day will “remain in the U.S. market through the end of the summer,” said Christin Kelley, senior commodity analyst at Schneider Electric, in a Tuesday note. That “should allow for larger storage injections and help inventories see a greater recovery before the start of winter,” she said.
Beyond Freeport, Velandera’s Raj said traders are concerned that other LNG terminal owners will “take cautionary measures, which means more maintenance downtime and less exports.”
Meanwhile, energy market regulators are also likely to delay approving or certifying upcoming projects,” he said. ” Any natural gas not exported will obviously remain in the U.S., therefore these events substantially boost domestic supplies.”
Losses in natural-gas prices Tuesday contributed to a steep drop in the front-month contract settlement of $9.322 on June 6, which was the highest finish since Aug. 1, 2008.
Kunisch referred to the price drop as a “fundamental ‘kick to the gut’.”
“We see the combination of growing domestic gas stocks as a result of reduced short to medium run LNG export demand, the uncertainty about the future health of the U.S. economy,” the growing potential of the Federal Reserve to increase the overnight lending rate by 75 basis points, “along with possible long positions exiting the trade and new shorts entering as the key driver,” said Kunisch.
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