Natural gas continues its rally, with prompt prices at a multi-week high
The June Henry Hub contract posted a gain of 16c this week, following last week’s sharp rally, which brought prices back above $3.75/MMbtu. The June contract settled at $3.79/MMbtu this week after mostly trading sideways except for a move higher on Friday. Both Winter ‘25/’26 and Summer ’26 gained 6c on the week to finish at $4.77/MMbtu and $4.16/MMbtu, respectively.
Both planned and unplanned outages plagued the US LNG export fleet this week, with total feedgas inflows briefly dropping to 12.75 Bcf/d on Tuesday. The Cameron LNG export plant has seen flows drop from 2.4 Bcf/d to about 1.5 Bcf/d as it undergoes maintenance. The facility is expected to remain under maintenance for the next few weeks, keeping LNG export volumes limited. In addition to this planned outage, Freeport LNG suffered a power loss, sending inflows to zero temporarily. The facility subsequently returned to operations the following day, without explaining what caused the loss of power. This is not an uncommon event at Freeport, with similar events happening every few months.
The EIA published its latest Short-Term Energy Outlook this week, reducing its estimate for US gas production. The agency cut its forecast, citing reduced associated gas production resulting from lower oil production and prices. The EIA expects Lower-48 dry gas production to average 104.9 Bcf/d in 2025 and 106.4 Bcf/d in 2026. In addition, the forecast for the average Henry Hub price in 2025 was cut by 3.6% to $4.12/MMbtu, while the 2026 price forecast was raised by 4.4% to $4.80/MMbtu.
AEGIS recommends hedging with swaps for near-term contracts, costless collars for Winter ‘25/’26, and either swaps or tight collars for Summer ’26.
Natural Gas Factors
Price Trend. (Bearish, Priced In) While gas prices have rebounded over the last two weeks, prices remain well off the highs seen in March.
S&D Balance. (Mostly Bullish, Priced In)
Storage Level. (Mostly 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 stands at 21 Bcf above the five-year average and 20 Bcf above last year.
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.
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.
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.
LNG Schedule. (Bullish, Surprise) With a significant amount of new LNG feedgas demand coming this year and the next few years, if these facilities startup sooner than anticipated it should be a bullish factor for gas prices. One example of this occuring is the recent startup of Plaquemines LNG, which saw feedgas levels reach more than 1 Bcf/d much sooner than anticipated.
Production Front-Running. (Bearish, Surprise) If producers begin to ramp up gas production in advance of the new LNG demand, this could lead to a temporary mismatch between supply and demand and weaken gas prices. The other option would involve producers waiting for a price signal from the market before increasing output.
Hedge Activity. (Bullish, Surprise) Following the sharp rally in January, many producers may have taken advantage of the higher prices and layered in more hedge volumes. This could result in less selling pressure down the curve if they are more adequelty hedged now.
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