Natural Gas Prices Continue to Drop for the Third Week in a Row Despite Modest Cold Snap
Natural gas prices fell for a third consecutive week, with the April contract settling 12.2c lower than last Friday at $2.216/MMBtu. Prices are at the lower end of the range they have been trading in since February, while a cold snap this week was unable to generate enough demand to move prices higher.
The weather was moderately supportive of gas demand this week, with seven heating degree days more than the 10-year average. However, with average temperatures beginning their seasonal increase, market participants have started to look ahead to this summer. With temperatures rising, weather-driven gas demand is set to decline, with the next two weeks expected to average 75 Bcf/d compared to the last two weeks, which averaged 87 Bcf/d. Limited shoulder-season demand and high levels of storage will likely keep upwards price movement relatively muted.
Demand from LNG exports has been flat yet unable to reach the 14 Bcf/d peak seen in late February. Freeport LNG has continued to ramp up flows, although a source quoted by Bloomberg this week spoke of issues with one of the facility’s liquefaction trains, stating that it was damaged during the restart process. Freeport has not responded to these claims, and it is not yet clear what impact the issue could have or how long a repair could take. While Freeports flows increased this week, the Calcasieu Pass export facility experienced a reduction of about 0.45 Bcf/d, offsetting Freeports gains.
AEGIS Hedging recommendations continue to be swaps for the summer seasons and costless collars for the winter seasons. While the Summer ’23 strip has declined significantly to $2.69/MMBtu, further out in the curve prices are trading at prices we believe are very attractive to hedge. For example, Summer ’24 is trading at $3.47/MMBtu, and Winter ‘23/’24 is at $3.72/MMBtu.
To see details on factors we believe are affecting gas prices and trade recommendations, click the "Read More" button on the Factor Matrix section in the AEGIS Research Module.
Natural Gas Factors
Price Trend. (Bearish, Mostly Priced In) Gas posted a 5.2% loss this week. April '23, gas lost 12.2c week-over-week to settle at $2.216 MMBtu. Bearish weather, in addition to fluctuating power demand and storage levels, have been the primary factors affecting the price trend this past week.
S&D Balance. (Bearish, Priced In) The weather has been the focus of gas prices for months, but we estimate that the weather-adjusted S&D means the market is slightly loose. Lower usage due to warm weather was a factor in causing a drop in demand. This week's inventory report (draw of 72 bcf) helped push the storage to a surplus of 504 Bcf to the five-year average. Furthermore, the bearish weather forecast, compounded with less power demand, could increase the surplus. The three-train, 2.3 Bcf/d Freeport LNG plant said in a release that it expects to be turning about 2.1 Bcf/d of gas into LNG in late January 2023 and reach full production using both docks by the end of March.
Weather. (Bullish, Priced In) Bearish weather has been a major driver in prices this year. Despite the freeze-off in late December, January and February were the hottest since 2000. The weather models forecast a cold pattern in the 8-14 day period for the lower-48. Despite the relative cooling, the average temperatures are expected to remain above 50 degrees for the next two weeks, indicating a warmer forecast.
Storage Level. (Bearish, Priced In) The storage level is a mostly bearish priced-in factor because, under normal weather conditions, a tight S&D balance could lead to a lower end-of-winter storage number than expected. But recent bearish weather and less-than-expected inventory withdrawals could decelerate the storage levels. Relatively smaller withdrawals and an unexpected build have pushed the storage levels to the five-year average to a 504 Bcf surplus. Before warm weather struck in August and September, the market generally agreed that the gas S&D was tight and that we could see a supply shortage by the end of the winter season. While those concerns have abated, January weather (bearish) could cause the end-of-season inventory number to be nearly 500 Bcf above the five-year average as the withdrawal season progresses.
Coal Availability. (Bullish, Priced In) Global coal prices remain high, making it harder to switch from coal to gas. The war in Ukraine was the major factor behind this change, and Europe is trying to secure a substitute for Russian coal because of the sanctions. A lower coal supply means less substitution potential. This should continue to support gas. Coal prices have been on the rise in the past month and have surged by nearly 50%, and that coincided with the relatively lower gas prices is a bullish factor for gas-fired power generation.
Power. (Bullish, Surprise) As gas prices have declined, it should be supportive of increased coal-to-gas switching. We are seeing signs of this mechanic, as coal's share of the power stack has declined relative to natural gas. This is one of the largest bullish factors and one of the main ways that the market can deal with oversupply.
Dry Gas Production & Associated Gas Production. (Bearish, Surprise) These are the most critical drivers of gas prices, outside of weather, in the next 18 months. 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 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. The rate of gas production has been returning after the winter storm and is around 96 Bcf/d over the past week. Given the rising servicing costs in West Texas, the associated gas production rate in the Permian region may decline by 2023. Producers might consider slowing their planned drilling expansions in 2023, as prices have fallen.
Supply Chain Constraints. (Bullish, Surprise) Several pipelines responsible for carrying gas from the Permian basin to other demand centers are currently running at limited capacity. Throughput on the Gulf Coast Xpress Pipeline and the El Paso Natural Gas Pipeline is down by around 0.7 Bcf/d and 0.5 Bcf/d, respectively. If these constraints persist into the next year, when Permian output is expected to rise, they will act as a bullish factor since they limit the takeaway capacity from Waha to Henry Hub. Additionally, U.S. producers are struggling with supply chain disruptions, such as a shortage of workers, and equipment, a scarcity of sand for fracking operations, and high metals prices, to take advantage of increased global demand and high oil prices. These constraints could influence driving the prices up.
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 operating 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 at near-record levels. An explosion at Freeport LNG's liquefaction plant took the plant offline in June 2022. Freeport is guiding towards a gradual restart with a return to full capacity by the end of March 2023.
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 2022 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. Supply chain constraints have escalated lately, with crucial solar materials, including polysilicon, steel, aluminum, semiconductor chips, copper, and other metals, becoming scarce and expensive.
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.
Freeport Restart. (Bullish, Surprise) The return of the Freeport LNG export facility in spring 2023 should add 2.1 Bcf/d of incremental demand. This factor may not be fully priced in by the market yet. Freeport LNG has been granted FERC approval for the full restart of all liquefaction trains. With the latest approval, the terminal should be able to gradually increase to a peak rate of 2 Bcf/d, which Freeport expects to happen "in the next few weeks."
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