Natural gas posts substantial gain despite continued storage looseness
The July Henry Hub contract advanced 33c this week to settle at $3.77/MMbtu, with much of the week’s gains coming form a 10c move on Friday. Winter ‘25/’26 gained 29c to settle at $4.67/MMbtu, while price action was more muted further out the curve. Summer ’26 rose by only 6c to $4.16/MMbtu. This week’s move came despite a further increase to the storage surplus and weakness in LNG feedgas demand.
The EIA reported the sixth consecutive 100+ Bcf storage injection this week, further elevating inventories above the five-year average. Gas storage is now 117 Bcf above the five-year average, but still lower than year-ago levels. The recent string of large builds is a result of weak weather-driven demand and relatively strong production, which has averaged about 105.5 Bcf/d this year. With the weather and demand outlook improving over the next two weeks, the pace of storage injections should slow somewhat. Our estimate for the amount of gas in storage at the end of injection season in November remains at 3.91 Tcf, assuming power burn is roughly flat to year ago levels on a weather adjusted basis, and that production reaches 108 Bcf/d by the end of the year. If production remains lower, around 106 Bcf/d, inventories may end the season closer to the five-year average at 3.73 Tcf.
LNG feedgas demand fell to the lowest level since January, at 14.34 Bcf/d. This drop was driven primarily by maintenance at multiple facilities. Cameron LNG has seen reduced flows for more than 30 days now, in a longer outage than previous years. Meanwhile, Sabine Pass LNG took Trains 3 and 4 offline, as maintenance occurs on the plant and the Creole Trail pipeline which supplies it. However, Plaquemines LNG hit a new record of 2.8 Bcf/d, following FERC approvals to flow more gas to their liquefaction blocks.
AEGIS continues to hold a neutral view on the balance of Summer ’25, and a bullish view on Winter ‘25/’26 and beyond.
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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