Natural Gas Bottom Line – Natural gas prices have been mostly flat for over a month now. The front of the curve was down about 12c to $2.52/MMbtu for the week ended April 9, but the rest of the curve moved only a few pennies. A mild shoulder season for gas has kept prices from rising and has impacted the outlook for how storage will shake out heading into next winter. That being said, our weekly measures of supply and demand show a continued tightening over the past three to four weeks following some post-February freeze weakness.
Winter storm Uri likely had a lasting impact on gas demand – possibly seven weeks! The market is moving back to be undersupplied by at least 1 Bcf/d, by our estimates. Data from late February and March gave us pause on our upside-friendly view, but things look to be trending back to a more bullish stance. Watch out for some weakness this year that wasn’t there last year; renewables could have a pronounced effect on gas prices this spring, when overall gas demand is low.
AEGIS hedge recommendations still favor the collar structure starting in July, given our upside view. A swap in the front two months is to protect against possible shoulder-season weakness.
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
LNG. Recent gas flows to LNG facilities have been higher than the pre-February freeze maximum. LNG demand should provide bullish support this summer as the current global arbs are open. According to Bloomberg data, gas flows into LNG facilities reached a record-high of 11.8 Bcf/d on March 19. Additionally, another 1.3 Bcf/d of incremental demand is expected to come online towards the end of 2021, as trains at Venture Global’s Calcasieu Pass and Cheniere’s Train 6 come online.
Storage Level. Storage has now flipped to injections, as withdrawals are likely finished for this season. We will continue to watch the injection/ withdrawal trends in hopes that more color will be provided. We moved this factor upwards and more neutral to shift focus to end-of-summer storage levels.
Oil Price. We moved this factor downwards slightly. WTI had gained over 37% YTD, through March 12, for its best start to a year in at least 30 years. Since then, oil prices have traded in between $58 – $62/Bbl, a level many analysts say would be enough to grow output in the U.S. Despite this, company guidance suggests that output is expected to remain relatively steady in 2021. If oil prices rise, it would be a bearish development for natural gas producers if the higher oil curve incentivizes oil producers to increase production and thereby associated gas production.
Renewables. Year-over-year gains in wind generation are cutting into what would otherwise be coal or gas demand. Wind generation reached an all-time high of 1800 GWh on 03/29 and averaged 1234 GWh/day during March, a 265 GWh/day year-over-year increase. Renewables remain a bearish surprise in our factor matrix as new renewable facilities enter the bottom of the power stack and eat into gas demand when wind levels are high and when the sun shines.
Mexico. Guessing the timing of Mexico’s pipeline and power plant completions are challenging, but infrastructure plans within the country could expand U.S. exports to the south. The 14-day moving average of gas exports to Mexico is currently at a record-high level of 6.53 Bcf/d. Further, flows on the historically underutilized Sur de Texas pipeline are starting to ramp up as downstream demand has seen an uptick. If the seasonal pattern of increased exports to Mexico during the summer season holds, we could see even more natural gas make its way to our neighbors in the south.
Dry Gas Production & Associated Gas Production. These are the most important drivers of gas prices in the next 18 months. We think these Factors together are mildly priced-in, but not fully. The market needs to see how demand shapes up.
Weather. The blistering cold of mid-February is behind us and the forecast shows more moderate temperatures. We moved weather out of the bullish quadrant to reflect this factor’s more neutral effect on forward prices.
Market Sentiment. We moved this factor toward more bullish as recent weather events and outlooks on gas production for 2021 cause market participants to have a rosier price outlook for gas. The market has been tight, and with the greater-than-expected reduction in storage, some analysts’ points of view have shifted toward more bullish. We believe the price does not yet reflect how the fundamentals are lining up.
Canada. Imports from Canada this fall and winter could be a bearish surprise. Eastern Canada storage is high.
COVID-19 Demand/Economy. While the worst of COVID-19’s impact on gas prices seems to be over, this bearish factor could become more priced-in very quickly if another lockdown or similar type event is imposed. Further, it is yet unknown how space-heating demand will perform when the weather gets cold; many workers are at home rather than in commercial buildings, and commercial vacancies have increased.
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