Natural Gas Curve Continues to Trade Lower Amid LNG Delays
Natural gas finished the week lower by 9c at $2.49/MMBtu, after falling as low as $2.26/MMBtu intraday. While there was a decent rally in the second half of the week, it was not enough to push gas into positive territory and avoid a sixth consecutive weekly decline in the January contract.
The Cal ’24 strip has been particularly impacted by selling pressure over the past couple of weeks following the updated guidance from ExxonMobil regarding their Golden Pass LNG export facility. There is now concern in the market that the Golden Pass facility, one of the next LNG export plants to enter service, may not start taking feedgas until 2025. Many market participants expected the facility to begin taking gas in the second half of 2024, which would likely have helped tighten the supply-demand balance, which looks oversupplied in 2024.
Another notable LNG development came from Freeport LNG. The company has agreed to pay the US Environmental Protection Agency a fine for violating the Clean Air Act due to the June 2022 explosion at the export plant. While this fine may not be particularly meaningful for the gas market, it may lead other facilities to focus more on maintenance in the future. An increased focus on preventative maintenance could lead to lower average utilization rates, whereas many gas market forecasts assume LNG facilities operating near nameplate capacity.
AEGIS recommends hedging summer-month contracts with swaps and winter contracts with costless collars. A costless collar will allow for upside participation and benefits from higher levels of call skew during the winter. Higher call skew can provide a producer with a higher hedge floor in the collar.
Natural Gas Factors
Price Trend. (Mostly Bullish, Mostly Priced In) Gas prices finished lower for a sixth straight week. Prices fell mostly on the back of a bearish weather outlook, news of delayed LNG projects in 2024, and strong production. January '24 NYMEX Henry hub lost 9c, or 3.49%, this week to finish at $2.491/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 indicates a net increase in temperature, particularly in the 6-10 day forecast, which saw a rise of nearly +10 degrees. This change was attributed to an intensification of the upcoming warming event rather than a timing difference. Although a brief cold spell is expected early next week, the model suggests potential for colder weather towards late December. However, this forecast for late December cold remains uncertain, as it hasn't been consistently maintained in the daily updates of the model.
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 high 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) As temperatures cool and the maintenance season is almost over, LNG flows are near 14.5 Bcf/d. Freeport LNG's FERC approval paves the way for a short-term full restart, potentially increasing utilization to around 2.1 Bcf/d. Currently, the terminal operates with two storage tanks and one jetty since its partial restart earlier this year. 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 late 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 late-2024.
ExxonMobil has postponed the start of operations for its Golden Pass LNG Train 1 from August 2024 to the first half of 2025, with the facility likely to be mechanically complete by the end of 2024. Initial gas flows are expected around late December 2024 or early January 2025, and Train 1 is projected to have a capacity of 0.68 Bcf/d. Meanwhile, Plaquemines stage 1 is set to have a prolonged start period of about 24 months. It is still expected to come online in 4Q 2024.
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.
Cold 1Q2024. (Bullish, Surprise) Some meteorologists forecast a colder February, and if it materializes, it could be bullish for 1Q2024. However, the reliability of long-term weather forecasts is limited, as their accuracy diminishes beyond a two-week period. Despite this uncertainty, such a weather change could still support the market, especially considering the current low prices of natural gas.
LNG Outages. (Bearish, Surprise) Feed-gas levels are at their near max capacity and if there's any unplanned maintenance event or an outage, it might act as a surprise bearish factor for natural gas prices
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