US natural gas futures turned lower on Friday, giving back part of the sharp gains from the previous trading session.
Earlier, a leak on TC Energy's Columbia Gas Transmission pipeline in West Virginia reduced transport capacity, at one point affecting as much as 1.5% of natural gas supply in the Lower 48 states and driving prices sharply higher on Thursday.
However, supply concerns cooled as the market anticipated that the disruption would likely be short-lived.
As of Friday, the near-month natural gas futures contract for October delivery on the New York Mercantile Exchange fell 5.5% to $3.115 per million British thermal units.
The contract had surged 9% on Thursday, marking its highest closing level since June 25.
Pipeline Leak Triggers Force Majeure, Daily Transport Capacity Cut by 1.8 Billion Cubic Feet
The direct trigger for the dramatic price swing came from the pipeline incident in West Virginia.
After a leak on the Columbia Gas Transmission pipeline triggered force majeure, the Mountaineer Xpress pipeline subsequently reduced its transport capacity.
As a key local natural gas transportation artery, the pipeline's firm transport service capacity was reduced by 1.8 billion cubic feet per day, pushing US natural gas futures sharply higher on Thursday.
The disruption came at a time when US natural gas supply was already somewhat tight.
In recent weeks, as the traditional autumn off-season for demand approached, natural gas producers in the Appalachian region had already begun cutting output, and the pipeline interruption further tightened short-term supply.
However, Ritterbusch & Associates said that for now, the pipeline disruption may not last very long.
The firm also believes that Thursday's sharp reaction in natural gas prices to the pipeline incident may have been amplified by a large buildup of speculative short positions in the market.
Because US natural gas inventories maintained a relatively ample buffer throughout this summer, some traders had grown less vigilant about supply risks.
When an unexpected supply disruption occurred, short covering may have further magnified the price gain.
This also means that Thursday's 9% surge may not have fully reflected actual supply losses, but was also driven by market position adjustments.
European Natural Gas May Fall More Than 5% This Week, But Storage Only About 70% Full
Meanwhile, on the other side of the Atlantic, the European natural gas market has been relatively weak.
Amid market expectations for progress in diplomatic efforts to end the Middle East war, as well as mild seasonal temperatures and heating demand that has yet to meaningfully pick up, European natural gas prices are expected to fall more than 5% cumulatively this week.
However, the supply foundation of the European natural gas market remains relatively fragile.
Currently, the inventory rate of EU natural gas storage facilities is only about 70%, meaning that once a new supply disruption occurs, natural gas prices could still react quickly.
ANZ analysts pointed out that compared with crude oil, liquefied natural gas (LNG) has lower transportation flexibility, because LNG shipping relies on specialized vessels and is more susceptible to security risks.
Therefore, given uncertainties in the geopolitical situation, potential risks to European natural gas supply cannot be ignored.
In addition, due to maintenance at natural gas facilities, the volume of natural gas transported by pipeline from Norway to Europe has recently declined, further tightening the European natural gas market.
Overall, the US and European natural gas markets are currently showing different short-term drivers.
After experiencing the supply shock caused by the pipeline incident, the US market saw prices fall significantly as the disruption may end relatively quickly; Europe has weakened due to mild weather and expectations of easing geopolitical tensions, but low inventory levels, declining Norwegian supply, and LNG transportation constraints mean the market may remain highly sensitive to any new supply disturbance.