Natural Gas Prices Rally to Highest Level in Over a Month
This was the first week of the June contract being the prompt month Henry Hub contract, and prices posted a substantial gain. June gained 21c to settle at $2.14/MMbtu, Winter ‘24/’25 finished 10c higher at $3.45/MMbtu, and Summer ’25 was up 3c to $3.32/MMbtu. LNG feedgas levels strengthened this week, but construction issues may delay the next facility to enter service, and pipeline maintenance outages continue to impact gas flows in various regions.
Freeport LNG intake volumes climbed from zero to just under 1 Bcf/d this week amid a significant facility-wide maintenance event. While two of the three liquefaction trains are off for planned maintenance, a third train has been offline after an equipment malfunction. It appears one of the trains is beginning to take some gas as flows steadily climbed over the past few days. This has lifted total US LNG volumes to 12.3 Bcf/d. While Freeport should return to regular operations in early June, Sabine Pass LNG will enter a significant maintenance event in June. This event will reduce Sabine Pass’s volumes from 5 Bcf/d to 3 Bcf/d throughout the month. In addition, Cameron LNG is currently undergoing work, impacting 500 MMcf/d through the end of May.
Bloomberg reported this week that Golden Pass is having issues with construction, driven by a shortage of workers. This is the next facility to enter service, and a delay to its in-service date could have a bearish impact on prices further down the curve. LNG production was slated to begin at the end of 2024, but in December 2023, Exxon pushed this back to the first half of 2025. If other facilities encounter similar issues this could weigh on Henry Hub prices.
Pipeline maintenance is occurring in several regions, impacting interregional gas flows and production. Work on several pipelines, notably the NEXUS system, has reduced Appalachian production. The conclusion of this work in mid-May could lead Northeast production to rise slightly from its current levels of around 32.3 Bcf/d. NGPL continues to work on the section of their pipeline which sends gas east from Texas to Louisiana, reducing flows from 1.2 Bcf/d to 800 MMcf/d through the beginning of June. However, on Friday, NGPL issued a force majeure due to flooding in the area, further reducing capacity by another 120 MMcf/d. This event may be leading to more supply staying in the Texas Gulf Coast region, weakening NGPL TxOk prices and Houston Ship Channel prices while providing support to prices on the other side of the Louisiana border. However, it appears much of the lost capacity has been rerouted, leading to a smaller price impact.
AEGIS recommends hedging summer months with swaps and winter months with costless collars. A costless collar can provide additional value in the form of a higher hedge floor in the winter due to increased levels of call skew.
Natural Gas Factors
Price Trend. (Bearish, Priced In) Gas prices finished higher this week. Prices rose amid low production, swelling storage surplus, and a moderate weather outlook into May. The May'24 NYMEX Henry hub gained 21.9c or 11.39% to finish at $2.142/MMbtu
S&D Balance. (Partly Bearish, Priced In)
Weather. (Bearish, Priced In) The Euro Ensemble forecast has been experiencing significant fluctuations, with the latest update showing a colder shift east of the Rockies and a warming trend in the west, resulting in an overall decrease of 8.3 degrees across the Lower 48 states. However, these regional temperature shifts have not significantly altered the general weather pattern for the Lower 48, which is expected to warm up next week before transitioning to a more moderate temperature profile.
Storage Level. (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, which had been narrowing, reversed this week, rising by 33 Bcf to 655 Bcf above the average. Although this is still below the peak of 669 Bcf seen four weeks ago, the increase in the surplus, likely caused by low LNG feedgas volumes and weak weather-driven demand, is seen as a bearish development for the market.
Dry Gas Production & Associated Gas Production. (Bullish & Bearish, Partly Priced In) 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 seaosnal 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.
LNG. (Bullish, Priced In) As temperatures remain miland the maintenance season is almost over, LNG flows are near 12.5 Bcf/d. 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 late 2024. Sabine Pass's Train 6 and Calcasieu Pass have finished construction and started operations in 2022. There is going to be a lull in new feedgas demand until ExxonMobil's Golden Pass facility comes online in 1H-2025.
ExxonMobil has postponed the start of operations for its Golden Pass LNG Train 1 from August 2024 to the first half of 2025, with the facility likely to be mechanically complete by the end of 2024. Initial gas flows are expected around late December 2024 or early January 2025, and Train 1 is projected to have a capacity of 0.68 Bcf/d. Meanwhile, Plaquemines stage 1 is set to have a prolonged start period of about 24 months. It is still expected to come online in 4Q 2024.
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) Feedgas at Freeport LNG is expected to reach 0.3 Bcf/d, signaling partial resumption with one train coming back online post-outage. Freeport LNG's Trains 1 and 2 remain shut until May for inspections and repairs; Freeport LNG resumed receiving gas volumes earlier this week, peaking at 520 MMcf/d on Monday, which suggests one liquefaction train was operational before intake dropped to zero again due to ongoing maintenance. This fluctuation and the train remaining offline for the rest of the week have contributed to a decrease in the overall U.S. feedgas demand, which averaged 11.5 Bcf/d this week, exerting downward pressure on the gas market.
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.
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