Volatile Trading Week in Gas
Natural gas prices have experienced significant volatility recently due to shifting weather forecasts, fluctuating supply levels, and trader activity. The week saw considerable price movements. On Monday, November 11th, prices closed 26 cents higher than the previous Friday's close of $2.66, driven by cooler changes in weather models over the weekend. However, a significant shift towards warmer forecasts on Thursday led to a 20-cent decline in prices. By Friday, December gas settled at $2.823, reflecting a 16-cent increase for the week.
Market volatility has also been fueled by fluctuations in Lower 48 supply levels. According to S&P Global, U.S. dry gas production was at 100.1 Bcf/d on Monday but rose to approximately 102 Bcf/d by the end of the week. Appalachian production has been particularly responsive, adjusting output quickly based on local gas prices. Starting the week near 32 Bcf/d, it climbed to about 34 Bcf/d by Friday. This flexibility in Appalachian production is expected to persist through mid-2025, assuming the market continues to contend with abundant underground gas storage weighing on prices.
A primary factor contributing to current price weakness is excess storage. The EIA's latest report revealed another bearish build, bringing total working gas stocks to 3.974 Tcf. The last time storage levels surpassed 4 Tcf was in 2016. While we do not anticipate reaching 4 Tcf in 2024, high storage levels present a challenge for the market during the winter months. Projecting to the end of the withdrawal season in April, we estimate approximately 2.1 Tcf of gas will remain in storage under normal weather conditions, which is not conducive to higher prices.
We have maintained a neutral stance on the Cal '25 gas strip, viewing the first half of 2025 as bearish and the second half with greater bullish potential due to anticipated new LNG demand. In September, the April 2025 contract hit $3.43/MMBtu but has since fallen to $2.65/MMBtu as the winter 2024/25 strip declined amid high storage levels. Our bearish outlook on the 1H of Cal '25 has been consistent, shaped by these broader market dynamics.
Natural Gas Factors
Price Trend. (Bearish, Priced In) Gas prices have remained under pressure for several weeks, trading near $2.69/MMBtu after falling from $3/MMBtu in early summer. Prices posted a 43c loss last week but remained almost unchanged for the week ending November 8. A warm weather outlook, easing production, and a looming storage surplus continue to pressure prices.
S&D Balance. (Mostly Bullish, Priced In)
Long Range Weather Forecast. (Bearish, Surprise) Assuming normal weather, storage levels are expected to start winter elevated to the five-year average, but if weather comes in materially hotter than normal this summer, storage levels could end the season lower than currently expected. As summer has progressed, June came in as the hottest on record, while July was more subdued but still slightly above the ten-year average.
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. (Bearish, Priced In) The CWG forecast suggests a warm-dominated pattern from October 18 to November 1, likely setting a record for the warmest period on record for these dates. Models, which often underestimate warmth in such patterns, support this trend, driven mainly by a trough over Alaska (+EPO). A warm-dominant weather pattern is expected to continue through November, with current forecasts predicting one of the top three warmest Novembers on record, according to Commodity Weather Group. While models hint at some cooling in the West and slight temperature moderation in the East, high-pressure ridging signals and weak polar air influence support a primarily warm trend, though minor shifts may emerge mid-month
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, which had been narrowing, reversed this week, rising by 98 Bcf to 581 Bcf above the average. Although this is still below the peak of 669 Bcf seen last month, the increase in the surplus, likely caused by low LNG feedgas volumes and weak weather-driven demand, is seen as a bearish development for the market.
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) As temperatures remain miland the maintenance season is almost over, LNG flows are near 12.5 Bcf/d. 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 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.
Above Average Hurricane Season. (Bearish, Surprise)NOAA is anticipating a record hurricane season this year, given extremely warm ocean temperatures and reduced wind shear from El Nino, which is expected to transition into La Nina. In the past, hurricanes had a bullish impact on gas prices from reduced Gulf of Mexico supply. However, with only ~2 Bcf/d of US production coming from the gulf and a significant amount of LNG exports and power demand situated in the region, hurricanes are now a bearish risk.
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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