Natural Gas Forwards Sink Further as Market Sits Awash in Supply Ahead of Rising Cooling Demand – Natural Gas Intelligence

Natural gas forward markets continued to face fierce headwinds in early May, with prices selling off sharply through 2024, according to NGI’s Forward Look.

Henry Hub paved the way as June forward prices fell 25.0 cents from April 27-May 3 to reach $2.172 and the balance of summer (June-October) slid 21.0 cents to $2.390, Forward Look data showed. Losses were steep further out the curve as well. The winter 2023-2024 strip dropped 14.0 cents to average $3.452, while prices for next summer (April-October) dropped 12.0 cents to $3.280.

The discounts were an extension of the more modest declines that spread across the Lower 48 in the prior week, only this time more pronounced as any lingering late-season cold subsided. LNG demand also weakened, with seasonal maintenance curbing gas flows to U.S. export terminals. NGI data showed feed gas deliveries holding a little above 13 Dth/d on Thursday, off from highs above 15 Dth/d in late April.

[Want to know how global LNG demand impacts North American fundamentals? To find out, subscribe to LNG Insight.]

With production stubbornly holding not far off record highs, it’s a slippery slope for the gas market until summer heat arrives in full force.

“The June contract fell below the 20-day moving average with the early week decline,” said EBW Analytics Group LLC’s Eli Rubin, senior energy analyst. “The technical indicator has represented a key inflection point in recent months, and it is possible that the downturn could indicate a deeper test of support closer to $2.00/MMBtu in coming weeks.”

Fundamentally speaking, plunging weather demand, soft liquefied natural gas consumption and robust production set the stage for a wave of “enormous” storage injections in the coming weeks, according to EBW. The result could be a surplus that swells to more than 600 Bcf by early June.

The latest Energy Information Administration (EIA) inventory data showed little improvement in overall balances, even though the reference period included cool weather throughout much of the country.

The EIA said inventories for the week ending April 28 rose by 54 Bcf, which was in line with expectations but short of the prior year’s 72 Bcf injection and the 78 Bcf five-year average. The smaller-than-normal build lifted stocks to 2,063 Bcf, which is 507 Bcf above year-ago levels and 341 Bcf above the five-year average.

However, last year is hardly a steady barometer for a market comparison, according to EBW. The firm noted that an undersupplied natural gas market this time last year was fresh off a cold winter, flipped to a hot summer and was on pace for unacceptably low storage levels that sent Nymex futures shooting towards $10.00. Nonetheless, a surging year/year storage surplus may provide incremental ammunition for bears – and could help reinforce downward pressure, the firm said.

By mid-June, rising cooling demand could bring about a peak in the storage surplus, while stronger LNG demand and potentially softer production could help mark an inflection point for the gas market. EBW noted that as the supply/demand balance tightens seasonally, it is possible that a hot summer could still catalyze notable gains later this year.

Already, signs of tightening storage have emerged in the key South Central region. Inventories have remained well above historical levels. Still, it’s been seven straight weeks in which surpluses have contracted. The EIA said South Central stocks as of April 28 stood at a net 977 Bcf, which is less than 27% above the five-year average. Regional inventories were about 38% higher than the five-year average at the end of March.

“I’ve got the South Central surplus to the five-year average going from 205 Bcf to sub-150 Bcf by the end of May,” said a market observer on energy chat Enelyst. The “bear story seems to have shifted from a South Central issue to [an] East and Midwest issue.”

Indeed, inventories in the East and Midwest continue to track well above historical levels. The latest EIA data showed stocks in both regions remaining more than 30% above the five-year norm, with several weeks of mild weather on the way.

NatGasWeather said widespread heat would be needed in June if surpluses were to decrease under 300 Bcf. Weather alone, though, won’t be able to tighten up balances, according to the firm. Lighter production or even stronger power burns would likely need to come into play to meaningfully bring the market into balance.

For now, though, the supply response appears more likely in the second half of 2023.

The EIA this week said dry natural gas production in the Haynesville Shale, where the breakeven cost has been reported to be around $3.00, reached new highs in March, averaging 14.5 Bcf/d. This was 10% more than the 2022 annual average of 13.1 Bcf/d, according to data from Enverus. 

Haynesville natural gas production accounts for about 14% of all U.S. dry natural gas production, EIA noted.

With prices nearing the double-digits last year, producers responded by increasing activity in the Haynesville. Baker Hughes Co. said the number of rigs operating in the East Texas and northwestern Louisiana play averaged 65 rigs in 2022, a 43% increase from 2021. In the first three months of 2023, however, the number of active rigs in the Haynesville plateaued at about 68.

That said, executives at public exploration and production companies are maintaining their positive outlook for 2024 and beyond, given sustained structural demand growth from LNG.

Chesapeake Energy Corp. started cutting activity late last year and said it would drop rigs heading into 2023. The company was running 13 rigs across its positions in the Eagle Ford, Marcellus and Haynesville shales, but would have nine rigs running by the end of the year. It’s also dropping another completion crew after cutting two in the first quarter.

However, Chesapeake executives are encouraged by the forward curve. “We know that further activity reductions at this point are going to have an impact on 2024, and we think it’s premature to make that decision,” CEO Nick Dell’Osso said. “The contango that’s present in the curve for 2024 looks pretty constructive at the moment.”

Similarly, Comstock Resources Inc. CEO Jay Allison noted that while management must be “great stewards of managing our dollars in this low gas price environment,” more than $100 billion of U.S. LNG facilities are coming online in the next five years near the company’s Haynesville acreage.

California Prices Finally Lower

There were only a few markets that deviated sharply from benchmark Henry Hub during the April 27-May 3 period, all in California. There, forwards posted even sharper decreases – even though prices at some locations remained at a steep premium.

At the PG&E Citygate, for example, June prices plunged 46.0 cents through the week to $4.289, according to Forward Look. The balance of summer dropped 23.0 cents to $5.140, while the winter 2023-2024 strip fell 14.0 cents to $6.155.

June prices at the SoCal Border Avg. were down 43.0 cents to $2.451, and the balance of summer was down 39.0 cents to $3.550. Winter 2023-2024 prices averaged a dime lower through the period at $5.738.

SoCal Citygate, meanwhile, posted losses that were similar to the rest of the country but prices remained sharply higher.

Although Southern California Gas has no pipeline maintenance events planned for May, the utility is limiting withdrawals and injections at the Aliso Canyon storage facility. With limited flexibility in storage, and demand finally softening after a brutal winter, these factors have taken a toll on cash prices. SoCal Citygate cash stood at around $1.75 on Thursday. Looking ahead to June, SoCalGas is planning a moderate capacity reduction of 190 MMcf/d on Line 1030 beginning June 16. That work is scheduled to last through July 19.

Pacific Gas & Electric Corp., meanwhile, has several maintenance events taking place this month along the Baja and Redwood paths.

The post Natural Gas Forwards Sink Further as Market Sits Awash in Supply Ahead of Rising Cooling Demand appeared first on Natural Gas Intelligence

Source link

#Natural #Gas #Forwards #Sink #Market #Sits #Awash #Supply #Ahead #Rising #Cooling #Demand #Natural #Gas #Intelligence