AEGIS Factor Matrices: Most important variables affecting gas prices

Natural Gas Finishes Higher Despite Weak Shoulder-Season Demand

The prompt month (November) natural gas contract advanced 5c this week to settle at $2.929/MMbtu, with the October contract rolling off and settling at $2.76/MMbtu on Wednesday. Price action further out on the curve was muted as well, with Winter ‘23/’24 finishing the week 4c higher at $3.34/MMbtu, and the Summer ’24 strip also up 4c to $3.21/MMbtu.

Shoulder season dynamics are firmly in place, with gas demand expected to be limited over the next few weeks as temperatures remain moderate. Storage builds have already begun to accelerate, with the EIA reporting a 90 Bcf injection in this week’s inventory report. As it currently stands, Lower 48 gas storage is 189 Bcf above the five-year average, with this week's report showing the surplus expanding by a total of 6 Bcf. This should lead to inventories ending the injection season at a relatively healthy level, with our November end-of-season estimate currently at 3.78 Tcf, assuming 10-year normal weather.

There are about seven weeks remaining in the injection season, and for balances to move closer to the five-year average would likely require some early season heating demand in October. That currently looks unlikely as the two-week forecast going out to October 13 shows a total of 45 heating degree days, compared to the ten-year average of 77 HDDs over the same period. The two-week forecast shows a total of 95 cooling-degree days, slightly above the ten-year average of 87 CDDs. Unless forecasts begin to indicate temperatures more conducive to gas demand, price action should remain muted.

AEGIS continues to recommend hedging winter month contracts with costless collars and summer months with swaps. Costless collars benefit from higher levels of call-skew, which allows a producer to obtain a higher floor price on the collar. Winter ‘23/’24 skew levels are currently slightly above average, while Winter ‘24/’25 skew is one standard deviation higher than average.

Natural Gas Factors

Price Trend. (Bearish, Mostly Priced In) Gas prices finished slightly higher this week. Prices were pulled in both directions this week, including mixed weather outlook and with the change split between power sector demand and LNG feedgas. November '23 NYMEX Henry hub gained 5c, or 1.74%, this week to finish at $2.929/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 showed increased volatility. Today's update was colder for all regions except the West, which was slightly warmer. While the pattern for the Lower 48 was similar to yesterday's, it turned colder in the latter part of the forecast. The average temperature is expected to decrease by 5 degrees by the week ending 10/13, transitioning the Lower 48 to HDDs, though the change is minimal.

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.

Power. (Bullish, Surprise) As gas prices have declined, it should be supportive of increased coal-to-gas switching. We are seeing signs of this as coal's share of the power stack has declined relative to natural gas. This is one of the largest bullish factors for the summer season and one of the main ways that the market can deal with oversupply. This factor is likely to be more priced in now that much of the summer season is behind us.

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 flat 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.

LNG. (Bullish, Priced In) 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 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 2024. The export arbs to Europe and Asia remain wide open, with other global benchmark prices remaining high despite significant price drops during the 2022/2023 winter season. LNG feed gas flows to US export plants have been depressed most of this summer due to maintenance events and high ambient temperatures. 

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.

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