The January contract rolled off the board at $3.51/MMBtu, but not before nauseating many traders with high volatility. Gas futures for January briefly traded above $4.00/MMbtu on Thursday before paring gains into a settled price of $3.71/MMBtu. Volatility was likely attributed to traders' positioning around volatile weather forecasts and this week's low liquidity due to the Christmas holiday.
The price action for this January’s contract has us thinking about next winter. Yes, we have had some cold materialize and show up in the forecast, but fundamentals aren’t necessarily screaming bullish. Inventories are still 166 Bcf above the five-year average, basically the same level we were at this time last year. Production is down year-over-year but still hovering near 104 Bcf/d. There is one new LNG facility ramping up in Plaquemines, but it’s still in its early stages at only 0.5 Bcf/d so far. It begs the question. If January 2025 gas can hit $4.00/MMbtu, or even average high threes, what will next January trade? By next December, Plaquemines should be talking about 1.7 Bcf/d along with Corpus Christi Stage 3 consuming material volume. Also, Golden Pass LNG could be on the cusp of starting up, ramping LNG feed gas demand even higher. Combine the new LNG volumes with the likelihood that inventories will likely be at or below the five-year average this time next year, which could spell a recipe for higher observed prices. The January 2026 contract is currently trading at $4.56/MMbtu. That’s only about 56c higher than what we experienced once this week for the January 2025 contract. The bottom line is that the future looks bullish, starting next winter and into Cal 2026.
From a hedging perspective, utilizing collars for the Winter ‘25/’26 strip looks attractive for producers. The call-skew is advantageous at nearly a 2:1 ratio (meaning if you give up 30c of downside protection, you could get 60c of upside participation). Cal 2026, as a whole, is carrying a good amount of call skew that supports collars versus swaps. A swap at $3.89 for Cal 2026 is nothing to scoff at, but due to palatable call-skew and our fundamental outlook, we would favor the collar here and allow for more upside.
Natural Gas Factors
Price Trend. (Bullish, Priced In) Gas prices have rebounded sharply over the past few weeks, with prices briefly reaching $4/MMbtu. Cooler weather forecasts, a tightening S&D balance, and shrinking inventory surplus has supported prices.
S&D Balance. (Mostly Bullish, Priced In)
Long Range Weather Forecast. (Bearish, Surprise) Current long-term weather forecasts show temperatures are expected to be above average this winter. Although, it is important to note that the accuracy of long-range forecasts can be low.
Super-warm La Niña Novembers have led to mixed December outcomes, ranging from colder-than-normal to notably warmer. The warmest November (2001) was followed by a warm December, while the second warmest (2016) led to a colder December. Historical data groups these into three December outcomes: colder than CWG (2016), near CWG (2020, 1999), and warmer than CWG (2011, 2001), often influenced by a positive Eastern Pacific Oscillation (+EPO). Current conditions show a weak La Niña, similar to 2020 but with notable differences in ocean temperatures. The CWG outlook remains warmer than the 30-year average but cooler than the 10-year average. The NOAA model suggests a pattern resembling 2016, implying a possible cold December and warm Q1 2025, while a warmer December could mean more cold volatility in early 2025.
1-15 Day Weather. (Mostly Bearish, Priced In) Two-week forecasts show temperatures significantly above normal for the first week before cooling towards the latter half of the forecast period. Forecasts have trended colder recently, with most of the colder temperatures being in the eastern half of the US, which should be supportive of gas demand.
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. According to the latest EIA weekly natural gas inventory report, the surplus to the five-year average stands at 132 Bcf above the five-year average and 20 Bcf above last year.
Dry Gas Production. (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. Since the start of 2024, gas production has fallen sharply, driven by substantial curtailments and seasonal declines in Appalachia. Given low gas prices, producers may continue to curtail gas production until economics improve. A material drop in production could improve storage balances, but if prices begin to improve, there is a large amount of supply that can be brought back to market, which would be a bearish risk. With some evidence that production is now returning to the market, the dry gas curtailment bubble has been shifted to the bearish quadrant. A large amount of production was likely taken offline this year, which is now waiting to come back. Some operators may also have been drilling and completing wells during this time, which are ready to flow gas if economics have improved enough.
Associated Gas Production.(Bearish, Priced In)With oil prices remaining high and additional egress capacity coming to the Permian in the form of the Matterhorn pipeline, associated gas production may continue to grow in 2024. The Matterhorn pipe will send an additional 2.5 Bcf/d to the Gulf Coast, posing a bearish risk to Henry Hub and regional basis prices such as Houston Ship Channel.
LNG. (Bullish, Priced In) LNG feedgas volumes have pushed to a new high near 15 Bcf/d, with most facilities operating near capacity, and Plaquemines LNG is now receiving about 400 MMCf/d as it enters the commissioning stage. LNG should remain strong through winter before volumes begin to be reduced as temperatures warm up along the Gulf Coast.
ExxonMobil has postponed the start of operations for its Golden Pass LNG Train 1 from the first half of 2025 to late 2025 or early 2026, with the facility likely to be mechanically complete by the end of 2024. Initial gas flows are expected around late December 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, Partly 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) 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.
Slow Supply Response. (Bullish, Surprise) If production remains near where it is currently and does not grow into winter, this would be a bullish factor for gas prices. Typically, the Northeast region sees higher production receipts in the higher-demand months of the year. Still, due to lower activity levels over the past year, production growth may be more muted.
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