Natural Gas Futures Prices Crash as Supply Growth Improves Storage Outlook

Driven lower by higher production, moderate weather conditions and a continued reduction in feed gas deliveries to the Freeport LNG facility, natural gas futures prices collapsed during the period of trading from September 15 to September 21. Steep declines of more than 70 cents extended the October contract into the winter season (November-March), while the summer band (April-October) averaged more than 50 cents lower, according to NGI Future Prospects.

Notably, there was a wide range of pricing handles for the October contract with prices as low as $3.465/MMBtu at Nova/AECO C in Western Canada up to $8.675 at PG&E Citygate in Northern California. Of course, it is the shoulder season and higher prices should arrive at the beginning of winter. On Wednesday, the notoriously volatile Algonquin Citygate was just $6,717 for October, but nearly doubled for November and averaged $27,092 for the winter, Look forward the data showed.

Among the cheapest places for American gas was the Waha hub in the West Texas part of the Permian Basin. October prices in Waha slid $0.72 on the week to an average of just $5.058, according to Look forward. That’s $2.72 below the Henry Hub benchmark. It is important to note that these significant discounts extend until next year.

A similar trend was seen in daily spot prices. Waha spot prices averaged $1.43 below the Henry Hub price during the first half of September, NGI Daily Gas Price Index shows. By comparison, during the first half of September 2021, Waha was trading on average 24 cents lower than the benchmark.

Why is gas so cheap at Waha?

There are several reasons for the high base discount at Waha.

Production rates in a region, in addition to the availability of infrastructure to transport natural gas to areas of high demand, can affect regional gas prices. Recent pipeline maintenance in the Permian has contributed to a larger spot price difference between Waha and Henry Hub, Energy Information Administration (EIA) researchers pointed out.

For example, on May 2, gas flows out of the Permian on Kinder Morgan Inc.’s Permian Highway pipeline declined and Waha prices fell $1.82 below the Henry Hub price. El Paso pipeline maintenance last month reduced flows from West Texas to the Desert Southwest and California, contributing to a Waha price $1.78 lower than the Henry Hub price on the 26th. august. Last week, on September 16, Waha fell $2.06 below Henry Hub amid rampant Permian production and falling demand in some downstream markets.

For futures markets, the discounts result from a more structural change in market fundamentals.

Natural gas production in the Permian, largely a byproduct of crude oil production, has more than doubled in the past five years. It reached an annual high of 16.7 billion cubic feet per day in 2021 due to increased crude oil production in the region over the same period, according to the EIA. From 2018 to early 2020, Permian gas production outpaced pipeline transportation capacity growth.

Thus, given the limited transportation capacity to deliver gas to consumption centers, producers sold their natural gas at discounted prices. Notably, spot prices even slipped into negative territory several times during this period.

Eventually, the price gap closed when Kinder Morgan Inc. brought the Gulf Coast Express (GCX) and Permian Highway pipeline systems online. Meanwhile, a consortium including WhiteWater Midstream LLC, MPLX LP and a joint venture between Stonepeak Partners and West Texas Gas Inc. has commissioned the Whistler pipeline.

However, with continued production growth in the Permian amid high oil prices, pipeline capacity is rapidly shrinking. Market watchers have said it could be as early as next spring that Permian pipelines will peak.

Midstream companies wasted no time in seizing the opportunity to increase their throughput. Kinder Morgan has announced plans to add an additional 550MMcf/d of capacity to the Permian Highway, while talks are also underway to add 570MMcf/d of takeout to GCX. Devon Energy Corp., EnLink Midstream LLC, MPLX and WhiteWater also announced plans for the 2.5 Bcf/d Matterhorn Express Pipeline greenfield project.

“Since April 2022, additional pipeline projects out of the Permian have been announced that would increase pipeline transportation capacity by approximately 4.2 billion cubic feet per day by the end of 2024,” the researchers said. of the EIA.

Improving balances

Supply is also increasing in other basins.

Rob Wilson, vice president of analytics at East Daley Analytics, said the company is “bid bullish, price bearish” when it comes to natural gas. East Daley forecasts US gas supply growth of 4.6 Bcf/d by the end of 2023.

The recent ramp-up in production, after a lackluster summer, has contributed to the recent decline in futures prices. After fluctuating in the mid-90s Bcf/d for much of the summer, production climbed to a peak of 90 Bcf/d in August. In particular, production reached 100 Bcf/d a few times this month.

“An apparent increase in production at the end of the month adds to the list of potential near-term downside catalysts for natural gas,” said Eli Rubin, senior analyst at EBW Analytics Group.

And with continued growth ahead, storage inventories as well as the number of drilled but uncompleted wells (DUC) are expected to improve. Similar to underground storage, CIDs are also at historically low levels.

Recent government inventory data already reflects a loosening supply/demand balance. The EIA on Thursday announced an injection of 103 billion cubic feet into storage inventories for the week ending September 16. This was at the top of market expectations prior to the EIA report and easily exceeded both last year’s injection and the five-year average build.

Construction lifted inventories to 2.874 billion cubic feet, reducing the deficit to a year ago level of 3.071 billion cubic feet and the five-year average of 3.206 billion cubic feet.

Mobius Risk Group said the 26 billion cubic feet contraction in the year-on-year storage deficit is significantly less than the 40 billion cubic feet reduction recorded for the storage week ending August 25. is a level by which the market is likely to get excited.

According to Mobius, the question of whether this threshold is exceeded in the next EIA report deserves attention. A series of these builds would definitely favor the market bears during the fall demand slump.

“Daily storage data argues for this, but a caveat as outliers tend to reverse in subsequent reporting periods,” Mobius said.

Regarding the improved storage picture, Rubin said EBW’s most likely storage outlook at the end of October calls for 3.421 billion cubic feet of inventory. This is slightly bullish relative to market consensus – and still translates to a “surprising” 139 bcf (3.8 bcf/d) drop in storage shortfall relative to the five-year average .

The analyst noted that at various times this year, a short-term bearish outlook failed to materialize amid consistently bullish weather. “A similar bullish shift in the coming weeks could quickly send Nymex futures back to retest recent highs,” he said.

After trading sideways for the past few days, Nymex Henry Hub prices fell on Thursday’s storage news and continued lower on Friday. The October contract closed the week at $6.828, down 26 cents from Thursday’s close.

Storm Outlook: Bullish or Bearish?

For some time to come, it will likely be factors other than temperatures that will move the price needle.

NatGasWeather said cooling demand will remain high in Texas, the South and the Southeast for a few more days, while some areas farther east may see slight heating needs. By the first week of October, a warmer than normal trend is expected to emerge over much of the country, but is unlikely to lead to significant cooling demand.

The market also continues to watch for a strengthening of the tropical cyclone in the Caribbean, especially as some weather data predicts its arrival in the Gulf of Mexico (GOM) next week and then on the US Gulf Coast thereafter. NatGasWeather said each new model run brings a different scenario, “highlighting that there is a lot of spread on the destination of the cyclone, as well as its intensity.” Some data suggests it would make landfall along the Gulf Coast as a major hurricane.

“Potential impacts are difficult to predict, but recent years have shown that the net effect has been more bearish than bullish due to slower LNG exports and loss of demand due to cooler temperatures and outages. current,” said the forecaster.

On the exceptionally bearish side, it would be if a strong hurricane leads to an extended outage at a US liquefied natural gas export terminal, according to NatGasWeather. On the bullish side, production could be lost in the GOM and the Gulf Coast.

The National Hurricane Center said Friday that Tropical Depression 9 was expected to cross the central Caribbean Sea through Saturday and pass south of Jamaica Saturday night and Sunday. Thereafter, it is expected to approach the Cayman Islands Sunday evening and early Monday.

“Slow strengthening is expected over the next day, and the depression is expected to become a tropical storm by tonight,” the NHC said. “A larger escalation is expected on Sunday and Monday.”

Meteorologists are broadly supportive of an active back half of the tropical season, Rubin noted. “If this is true, a perfectly balanced natural gas market on a precipice and prone to volatility with inelastic demand and supply curves at prices close to current levels could be further shaken by rapidly changing market conditions. external market.

Edward N. Arrington