Natural Gas Prices Extend Losses, Falling Below $3.00/MMbtu
Natural gas prices slid lower for a second week, with the November contract declining by 33.6c this week and 47c over the past two weeks to $2.899/MMbtu. While the Winter ‘23/’24 strip fell by only 5c to $3.286/MMBtu this week, the Summer ’24 strip declined by 26c to $3.252/MMbtu.
Prices moved lower every day this week, but the largest drop occurred on Thursday following a surprisingly bearish inventory report. The EIA’s weekly storage report showed an injection of 97 Bcf into underground storage. This was far higher than market participants anticipated, with the Bloomberg storage survey showing a median expectation of an 81 Bcf build, the storage survey ranging from a low of +76 Bcf to a high of +91 Bcf. This puts the storage surplus at 176 Bcf above the five-year average and 300 Bcf above year-ago levels.
With less than a month to go in the injection season, it seems highly likely that we will start winter with about 3.8 Tcf in storage (our current estimate is 3.82 Tcf). This should prevent any concerns over scarcity or lack of supply, even if winter shapes up to be colder than average. However, with a starting point of about 3.8 Tcf, a milder-than-average winter could lead to a particularly high March end-of-season number, pressuring Summer ’24 prices.
AEGIS continues to recommend hedging winter months with costless collars and summer months with swaps. A costless collar will allow for upside exposure and benefit from higher levels of call skew, while a swap will provide a higher floor price on the hedge.
Natural Gas Factors
Price Trend. (Mostly Bullish, Mostly Priced In) Gas prices finished lower this week. Prices weakened mostly on the back of a moderate weather outlook. Front-month prices were also influenced by this week's storage build and moderate production. November '23 NYMEX Henry hub lost 33.6c, or 9.9%, this week to finish at $2.899/MMBtu.
S&D Balance. (Neutral, Priced In) After being consistently oversupplied since September 2022, our calculation of the weather-adjusted supply and demand balance has begun to show some signs of tightening in the past couple of months. This is likely driven by low gas prices driving gas burns higher relative to coal in addition to weak wind generation. A move higher in gas prices would likely push out some power sector gas demand in exchange for coal, moving the balance towards neutral or even back to oversupply.
Weather. (Neutral, Neutral) The weather model showed a general warming trend for nearly all regions in both the 1-5 and 6-10 day periods. However, a cooling trend was noted for the Northeast, Southeast, and Midwest in the 11-15 day forecast, hinting at potential early November cold. The Lower 48 forecast remains consistent with yesterday, predicting cooler temperatures by the end of next week and a rise in HDDs due to the cooling.
Storage Level. (Bearish, Priced In) The storage level is a bearish priced-in factor due to the high levels of gas in inventories relative to the five-year average. Although the surplus to the five-year average has declined this summer due to higher levels of power sector gas usage, a significant surplus remains, which should limit upward price movement and prevent any fears of supply scarcity.
Coal Availability. (Bullish, Priced In) Global coal prices remain high, leading the power sector to use more gas relative to coal. This should continue to support gas prices. Additionally, In spite of economic indicators suggesting otherwise, several power plants are opting to burn coal due to coal inventories being significantly elevated.
Dry Gas Production & Associated Gas Production. (Bullish & Bearish, Surprise) These are the most critical drivers of gas prices outside of weather. A material increase in either would pressure prices lower and loosen the supply-demand balance. These are also longer-lasting factors that can weigh on prices for years. Production was on the rise heading into 2022 year-end, mirroring the late push observed in 2020, particularly in the Appalachia, Haynesville, and Permian. Producer discipline, takeaway capacity constraints in some basins, and gas prices will likely drive production growth moving forward. The recent weakening in Waha forward prices may be a market signal that associated gas production could grow and face takeaway capacity constraints in 2023. However, with dry gas production flat so far in 2023, the risk of a decline in production is a potentially large bullish surprise factor that the market has not priced in. Additionally, the amount of maintenance this winter is higher than in previous years, and it is possible that there could be some production losses as a result.
LNG. (Bullish, Priced In) LNG feedgas demand has consistently exceeded 12 Bcf/d since the start of December 2021. As consumers avoid Russian fuel, demand for U.S. LNG is surging, reviving several long-stalled U.S. export projects. However, these projects will not be operational until at least 2024. Sabine Pass's Train 6 and Calcasieu Pass have finished construction and started operations in 2022. There is going to be a lull in new feedgas demand until ExxonMobil's Golden Pass facility comes online in 2024. The export arbs to Europe and Asia remain wide open, with other global benchmark prices remaining high despite significant price drops during the 2022/2023 winter season. LNG feed gas flows to US export plants have been depressed most of this summer due to maintenance events and high ambient temperatures.
Renewables. (Mostly Bearish, Priced In) Renewables remain a perennial threat to gas prices and gas's share of the power stack. Renewable capacity additions in 2023 are expected to set a new record and are now the second-most prevalent source of electricity generation. Still, renewables have proven unreliable at times, which has exacerbated the global energy squeeze as gas usually serves as a flex-fuel when other sources underperform. We think this is priced in, but the effect at the summer peaks on gas generation has some bearish potential.
Hedging. (Bullish, Surprise) Extreme volatility has driven great uncertainty and resulted in changes in how producers and consumers execute and plan their hedging strategies. Over the past year, we have seen trends in hedging volumes that showed producers not hedging as much when the prices are high. Our data suggests the industry is underhedged compared to historical levels, despite the bearish/neutral sentiment related to the lack of demand growth. Hence, we believe this factor to be a bullish and volatile one.
Commodity Interest Trading involves risk and, therefore, is not appropriate for all persons; failure to manage commercial risk by engaging in some form of hedging also involves risk. Past performance is not necessarily indicative of future results. There is no guarantee that hedge program objectives will be achieved. Certain information contained in this research may constitute forward-looking terminology, such as “edge,” “advantage,” ‘opportunity,” “believe,” or other variations thereon or comparable terminology. Such statements and opinions are not guarantees of future performance or activities. Neither this trading advisor nor any of its trading principals offer a trading program to clients, nor do they propose guiding or directing a commodity interest account for any client based on any such trading program.