News of lengthy Freeport LNG terminal outage hits NYMEX gas futures

NYMEX front-month natural gas futures got walloped on June 14 following news from the operator that the Freeport LNG export terminal will likely not fully return to service until late 2022, with partial service possible in about 90 days.

The July 2022 contract sold off to an intraday low of $7.008/MMBtu before prices rebounded slightly to close at $7.189/MMBtu, down a substantial $1.42/MMBtu (16.5%) on the day. Compared to just a week ago, when NYMEX front-month gas futures reached a new 2022 high of $9.664/MMBtu, prices are down a whopping 26%.

Storage reset

The Freeport LNG outage jumped from an estimated three-week event to a minimum three-month event virtually overnight, changing the outlook for gas storage and supply/demand. With Freeport potentially out of service for most of what remains of the gas storage injection season, storage levels could grow by 200 Bcf or more until the terminal returns to service.

From another viewpoint, dry gas production volumes are wobbling near 96 Bcf/d. When accounting for the roughly 2 Bcf/d demand loss of the Freeport LNG facility, the net equivalency of gas production becomes roughly 98 Bcf/d, which surpasses the record high dry gas production level of 97.5 Bcf/d set back in December 2021. It is also an estimated dry gas production level that is needed for supply/demand imbalances to normalize.

Funds squeezed?

Because of the magnitude of the downside move and the financial pain that the selloff inflicted on many bullish market participants, there is a hedge fund "blow-up watch" of sorts now happening in the gas futures market. If a mega-bullish hedge fund or two did indeed get financially hit to the point of non-recovery, then it would not be out of the question to see further near-term downside in NYMEX gas futures amid a forced liquidation of long positions. Of course, this sort of situation remains to be seen. Still, with already high margin requirements being enacted and the sheer magnitude of the sell-off, which was a near 17% loss in one trading session, it is not out of the realm of possibility that some funds could be in jeopardy.

Spot market

Spot market prices for June 15 flow saw hefty losses across the board in virtually all regions of the US. The NYMEX-sensitive Henry Hub shed $1.275 to average $7.595/MMBtu in the wake of the gas futures contract selloff. In the Northeast, the biggest mover was Transco, Zone 5 delivered South, which tumbled $9.255 to average $9.26/MMBtu. Just the day before, prices at this key hub had doubled due to regional pipeline constraints and operational flow orders.

In the Upper Midwest, Chicago city-gates fell $1.335 to $7.07/MMBtu, while in the Rockies, cash prices at Cheyenne Hub went down $1.05 to average $7.145/MMBtu. Along the West Coast, spot prices at PG&E city-gate declined by 85 cents at $8.73/MMBtu. Along the Redwood Path, cash prices at PG&E Malin came off $1.88 to average $6.37/MMBtu.