Natural Gas Prices Move Lower Again as Storage Surplus Reaches Eight-Year High
Despite supply coming in lower again this week, natural gas continued to sell off amid a further increase in the storage surplus. The April contract finished the week down 14c to $1.66/MMbtu. The Winter ‘24/’25 strip settled down 9c at $3.38/MMbtu, and the Summer ’25 strip closed down 1c to $3.25/MMbtu.
According to S&P data, production levels remained lower this week, around 101 Bcf/d. However, with prices continuing to sell off, the market may attempt to communicate the need for additional production curtailments. Of the reduced supply, the vast majority has been from Appalachia, with output down about 2 Bcf/d since the start of the year. Most other regions have also seen a decline, although much smaller, and production from the Permian is up about 130 MMcf/d this year. Keeping a sizable amount of production offline through the end of the year may be necessary to prevent inventories from rising to near capacity. According to our calculations, an average production level of 101-102 Bcf/d may be what is required to avoid this.
This week, the EIA reported a net withdrawal of 9 Bcf from underground storage, bringing the surplus to the five-year average of 629 Bcf. This is the highest storage delta since 2016 and shows the precarious situation in gas inventories. Next week, the EIA is expected to report another small withdrawal from storage. Still, with the withdrawal season ending in the next few weeks, inventories look like they will start summer with about 2.3 Tcf in storage, the highest March EOS since 2016.
We continue to hold a neutral outlook on Summer ’24 and Summer ’25 and a bearish view on Winter '24/’25. AEGIS recommends hedging the summer months with swaps and the winter months with costless collars.
Natural Gas Factors
Price Trend. (Bearish, Priced In) Gas prices finished lower this week. Prices fell despite low production and amid a weak weather outlook into March. April '24 NYMEX Henry hub lost 15c, or 8.6%, this week to finish at $1.655/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 forecasts mixed weather, with colder conditions in the Northeast/Southeast and warmth in the Midwest/South Central. This will result in an overall cooler Lower 48 into late March despite a post-cold rise in nighttime temperatures.
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. The surplus to the five-year average recently reached the highest level in several years, at 498 Bcf.
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 gas prices falling sharply, the risk of a decline in production is a potentially large bullish surprise factor that the market has not priced in.
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 last 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 1H-2025.
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 extended its month-long third train outage for an additional two weeks to complete motor repairs following freeze-induced electrical issues in January. 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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