Natural Gas Bottom Line – Freeport LNG outage is extended into year-end.
Prompt-month natural gas prices slid lower throughout the week, finishing 96c lower on Friday at $6.281. While changes to weather forecasts and storage levels led to volatility throughout the week, news on Friday from the heavily-watched Freeport LNG export facility likely weighed on prices.
On Friday morning, Freeport LNG delayed its expected restart date – again. The 2.1 Bcf/d export facility has been offline following a fire in June and has given multiple potential restart dates only to extend them each time. Their most recent timeline called for gas flows into the facility to ramp up in mid-December and reach full capacity by March. However, on Friday, Freeport extended this date another two weeks, bringing the expected restart date closer to the end of the year. The reason for the extension was regulatory procedures, a similar cause of the several previous extensions. Before Freeport can restart, it must submit several documents to federal regulators for approval. Once the export terminal restarts production, the gas market should tighten by about 2.1 Bcf/d.
According to our calculations, the market has been oversupplied by about 2 Bcf/d on a weather-adjusted basis for the past five weeks. The oversupply in the market is one of the main reasons gas inventories have built at such a rapid pace this fall, effectively erasing a hefty storage deficit that had existed through this summer. However, suppose the market balance returns to being balanced. In that case, combined with a forecasted cold December, storage levels could be much lower than average by the end of winter. The expectation of thinner inventories would support prices going into summer.
AEGIS Hedging recommendations for natural gas continue to be costless collars for clients who desire optionality and the ability to participate in the upside. We suggest swaps for clients who want the most certainty in their cash flows. The tiebreaker would go to how much “call skew” is present in the market. Your strategist can show you the current metrics.
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. (Mostly Bullish, Mostly Surprise) Gas posted a 14.31% loss this week. January '23, gas lost $1.05c week-over-week to settle at $6.281/MMBtu. Fluctuating dry and associated gas production rates, bearish storage builds along with bullish weather have also been the primary factors affecting the price trend these past few weeks. October has been volatile for gas prices as it was the last month of full inventory builds, but bearish weather might have pushed the inventory builds to last till mid-November before the withdrawal season started.
S&D Balance. (Bearish, Mostly 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 is a factor in causing a drop in demand. This week's inventory report (draw of 81 bcf) helped increase the shortfall to a five-year average of 86 bcf. The three-train, 2.3 Bcf/d Freeport LNG plant delayed its start-up date again to late December. Freeport said in a release that it expects to be turning about 2 Bcf/d of gas into LNG in January 2023 and reach full production using both docks in March 2023. Assuming the facility would flow near full capacity, that would add around 240 Bcf into South Central storage and would be added to the end-of-season forecast of 3.60 Tcf.
Weather. (Mostly Bullish, Surprise) Bullish weather has been a major driver in prices this week. As the forecast models have changed throughout the week, they have shifted to be mildly less cold. However, the average weekly temperature will steadily drop to around 42-47 Fahrenheit over the next two weeks. The week ending 12/16 is forecast to be the coldest of the season.
Storage Level. (Neutral, Priced In) The storage level is a neutral 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 bullish weather and larger-than-expected inventory builds have accelerated the storage levels. Large injections have pushed the storage levels to the five-year average from a 300 Bcf deficit to a 86 Bcf deficit in the past five weeks. 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, December weather (bullish) could cause the end-of-season inventory number to be 100-150 Bcf below the five-year average as the withdrawal season progresses.
Coal Availability. (Bullish, Priced In) Global coal prices have increased almost 30% in a week in March, and they still 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. Coal stockpiles are likely to decrease in 2022, while production will, at best, make a modest gain. 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. Additionally, the Mississippi River's drought has slowed down or stopped the flow of goods being transported by freight on the river. The Mississippi is used to transport around 35% of the thermal coal in the United States, thus this disruption can make the already high prices even worse. A potential rail strike that the government is trying to avert can affect coal prices. Nearly 70% of coal in the US is transported by rail; if coal costs rise as a result, Powergen, which depends on coal, may switch to natural gas, creating a bullish gas factor.
Power. (Bearish, Slightly Priced In) Power generation was a driver behind the market scarcity experienced in 2021. Many factors that led to increased natural gas-fired power generation would be back again in 2022. Underperforming hydropower on the west coast, and limited coal-to-gas switching availability, led to higher gas-fired power generation this summer. But as we enter the withdrawal season and demand might rise due to colder weather, the gas share of the power stack is expected to rise too.
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 holding near 100 Bcf/d over the past few weeks. According to EIA data, there has lately been flat apparent production in the Appalachian Basin but increased production in Permian and Haynesville.
Pipeline 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.
LNG. (Slightly Bearish, 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 this year. 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 is estimated to send nearly 240 Bcf of gas into storage as the plant is shut down for five months. Freeport LNG made an announcement that they expect to return 85% of production by late November and achieve full operation by March 2023.
Renewables. (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.
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