Natural Gas Prices Continue to Slide Lower Amid a Myriad of Bearish Factors
Weak weather-driven demand, persistently high supply, and a below-expectation storage report kept bearish pressure on gas prices. The prompt contract lost another 24c this week to finish at $1.61/MMBtu, bringing the total decline in price over the past two weeks to 48c.
Earlier in the month, weather forecasts anticipated a cooler shift towards the end of February, which has failed to materialize. Forecasts capitulated and now show this February as the second warmest of the past 20 years. Weak demand this month follows a relatively average January and a warmer-than-normal November-December period. As a result, storage levels have remained consistently elevated to the five-year average and once again moved above the five-year high this week following the weekly EIA storage report.
This week’s EIA storage report showed a withdrawal of -49 Bcf, compared to a median expectation of a -66 Bcf draw, according to the Bloomberg survey, which ranged from a low estimate of -76 Bcf to a high estimate of -57 Bcf. The smaller-than-expected print was driven by a sizeable build in South Central inventories that surprised many.
One of the largest factors impacting gas prices is the high production levels. A decline in production will likely be required to balance gas markets. If production continues to come in above 104 Bcf/d or even grows, inventories will likely continue to swell, further pressuring prices lower. However, if there is a decline in output, it would strengthen the bullish case for Cal ’25 and beyond when LNG demand begins to ramp up again.
AEGIS recommends hedging with swaps in the summer months and costless collars in the winter. Higher levels of call skew, or the relative expensiveness of calls to puts, can provide a higher floor for producers using a collar.
Natural Gas Factors
Price Trend. (Bearish, Priced In) Gas prices finished lower this week. Prices fell on the back of high production and a warmer-than-normal weather outlook into March. March '24 NYMEX Henry hub lost 23.8c, or 12.9%, this week to finish at $1.609/MMBtu.
S&D Balance. (Mostly Bearish, 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. (Bearish, Priced In) The weather model showed the Midwest cooling, balanced by warmer temperatures in other regions, with forecasts predicting above-normal temperatures into late February and early March. The coldest temperatures are expected over the weekends for the next two weeks, reducing residential and commercial demand. Should this forecast hold, the week ending March 1 is set to be the warmest since late December.
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.
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.
LNG Outages. (Bearish, Surprise) Freeport LNG anticipates one of its three trains to be out of service for a month due to an electrical issue with a refrigeration motor caused by last week's winter storm. 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.
On Wednesday of this week, feed gas flows to Cameron LNG rebounded by 28% to 2.35 bcf following a 14% decrease on Tuesday, and Freeport LNG saw a 67% rise to 1.47 bcf after a 39% fall on Tuesday due to maintenance; meanwhile, Cheniere's Corpus Christi increased by 5.5% to 1.53 bcf but was still 28% below the previous week, with all companies declining to comment on these fluctuations.
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