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Last Look - Oil prices rise, but post weekly loss on tariffs and OPEC+ production plans
Henry Hub continues to push higher as winter fades
The April NYMEX contract advanced sharply this week, trading up to levels not seen since 2022. The prompt contract settled up 30c on the week to $4.30/MMbtu after trading as high as $4.50/MMbtu. While the front of the curve saw the most gains, the Summer ’25 strip was higher by 36c to $4.46/MMbtu, and Winter ‘25/’26 gained 29c to finish the week at $4.92/MMbtu.
The storage deficit expanded to the widest level since 2022, with the EIA reporting a -80 Bcf withdrawal this week. This put US inventories 224 Bcf below the five-year average and 585 Bcf lower than storage this time last year. Withdrawals from now until the end of the season should be more muted as temperatures have warmed up across the US. Our current estimate for the amount of gas left in storage at the end of the withdrawal season is 1.69 Tcf, about 176 Bcf lower than the five-year average. This deficit has helped support gas prices for the next few seasons as there is now less of a supply overhang on the market.
Production moderated somewhat this week, but it may be driven by upstream dynamics relating to the recent freeze-offs. S&P data shows Lower 48 gas output averaging 104.3 Bcf/d this week compared to 106 Bcf/d last week. However, last week's production numbers may have been unusually high due to freeze-offs the prior week. Production freeze-offs can result in a temporary increase in well pressure, resulting in a jump in production, with this week being more of a return to normal. Going forward, high production levels may not be needed in the next few months, but by the start of Winter ‘25/’26, gas output will need to be around 108 Bcf/d to keep the market balanced to year-ago levels, based on our calculations.
AEGIS recommends clients hedge the summer months with swaps, while costless collars may be preferable for the winter months. The recent price rally has also seen volatility and call skew rise, potentially increasing the attractiveness of a costless collar for a producer.
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. (Bullish, Priced In) Two-week forecasts have supported prices lately, with this January being the third coldest of the past 25 years.
Storage Level. (Mostly 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 21 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.
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.
LNG Schedule. (Bullish, Surprise) With a significant amount of new LNG feedgas demand coming this year and the next few years, if these facilities startup sooner than anticipated it should be a bullish factor for gas prices. One example of this occuring is the recent startup of Plaquemines LNG, which saw feedgas levels reach more than 1 Bcf/d much sooner than anticipated.
Production Front-Running. (Bearish, Surprise) If producers begin to ramp up gas production in advance of the new LNG demand, this could lead to a temporary mismatch between supply and demand and weaken gas prices. The other option would involve producers waiting for a price signal from the market before increasing output.
Hedge Activity. (Bullish, Surprise) Following the sharp rally in January, many producers may have taken advantage of the higher prices and layered in more hedge volumes. This could result in less selling pressure down the curve if they are more adequelty hedged now.
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.