With production strong and demand fading, natural gas futures fell prey to price bears once again.
At A Glance:
- NGI models 65 Bcf draw
- Benign weather in cards
- Production at 104 Bcf/d
Coming off a 2.8-cent gain on Friday – but eight straight losses prior to that – the March Nymex gas futures contract settled at $1.576/MMBtu on Tuesday, down 3.3 cents day/day.
NGI’s Spot Gas National Avg. shed 1.0 cent to $1.585. This followed multiple declines the prior week.
Production hovered around 104 Bcf/d on Tuesday, according to Wood Mackenzie, down slightly from the prior week but up nearly 5 Bcf/d from a year earlier. Output reached record levels above 106 Bcf/d last year and held strong through early 2024.
Notably, futures climbed about a dime in after hours trading Tuesday after Chesapeake Energy Corp. said it planned to scale back production this year.
At the same time, Wood Mackenzie estimated Lower 48 demand at 101.5 Bcf/d on Tuesday, down more than 4 Bcf/d from the prior week’s average and down more than 3 Bcf/d from the comparable period in 2023. Wood Mackenzie estimated export demand on Tuesday was just shy of 13 Bcf/d, about 1 Bcf/d lower than recent highs.
Weak weather-driven demand remained the principal culprit of price weakness. After a chilly three-day Presidents’ Day holiday weekend, updated forecast “data maintained a return to light national demand Tuesday-Thursday as a warm ridge expands to rule most of the interior U.S. with comfortable highs.”
Farther out, the firm sees a dose of cooler air this coming weekend, but that is expected to be followed by benign conditions in the final week of February and the first week of March.
“A big question going forward is whether much cheaper natural gas prices will lead to lighter U.S. production in the spring,” NatGasWeather said.
Absent such a change, supply/demand imbalance could define the coming shoulder season, with supplies in storage stout and sitting at a hefty surplus to the five-year average, according to U.S. Energy Information Administration (EIA) data.
“There remains plenty of elements to the bearish side, highlighted by a massive bearish miss to last week's EIA storage report, very strong U.S. production, warmer trends for late February…and LNG exports underperforming,” NatGasWeather said.
“The net result of recent and coming weather patterns is for surpluses to increase towards plus-500 Bcf, starting with this week's EIA report and where it's likely to again print a draw nearly 100 Bcf lighter than normal. End of draw season supplies are expected to be near 2,100 Bcf unless colder trends show up for the first half of March,” the firm added. “Until weather patterns show a prolonged period of stronger than normal demand, it's possible natural gas prices continue lower to test $1.50.”
EIA most recently printed a storage withdrawal of 49 Bcf for the week ended Feb. 9. It fell short of expectations for a pull in the high 60s Bcf and was well below the 149 Bcf five-year average pull.
The decrease for the latest EIA report period lowered inventories to 2,535 Bcf, but stocks were 16% above the five-year average. That marked an increase from the 13% surplus to start 2024.
East region stocks were 9% above the five-year average for the latest week, while all other regions posted double-digit disparities. Mountain stocks were 51% above the five-year average, the biggest surplus by region.
Houlihan Lokey’s J.P. Hanson, global head of oil and gas, noted that the more than 40% decline in natural gas futures prices in 2023 extended into this year “primarily due to strong domestic production and the El Niño effect” on weather. El Niño patterns tend to result in mild winters in the North and overall modest heating demand.
LNG Boom Looms
Looking ahead to the EIA storage report covering the week ended Feb. 16, NGI modeled a 65 Bcf pull, in line with preliminary polling from The Desk that showed estimates coalescing around a draw in the 60s Bcf. The five-year average draw is 168 Bcf.
While less supply would help prices near term, Hanson said a production pullback to address near-term imbalance is hardly a sure thing. Producers ramped up to record levels in large part because of an anticipated surge in liquefied natural gas demand in 2025 and beyond. While some producers may slow down modestly during the shoulder season, others are hesitant to tap the brakes because they want to maintain momentum to meet the looming LNG wave.
“Continued global demand and massive U.S. natural gas reserves have incentivized LNG producers to expand capacity in the long term,” Hanson said.
RBN Energy LLC analyst Housley Carr noted ground zero for the coming LNG shift is a stretch along the Gulf Coast in Texas and Louisiana.
“On top of the existing 12.5 Bcf/d of LNG export capacity in the two states, another 11-plus Bcf/d of additional capacity is planned by 2028,” Carr noted. “The magnitude of the changes coming is enormous. There will be a slew of new LNG export terminals — even if the months-long pause on new gas-export licenses announced by the Biden administration on January 26 drags on.”
This bodes well for demand and prices in the long term. It likely will drive even greater output needs in coming years, too. “We will see rising gas production in both” the Permian Basin and the Haynesville Shale, Carr said. “And there will be more pipeline projects than you can shake a stick at.”
Cash Prices
Spot gas prices varied by region but were mostly in the red on Tuesday amid mild weather.
Chicago Citygate lost 9.5 cents from Friday to average $1.365, while Florida Gas Zone 3 was off 5.0 cents to $1.645 and OGT in the Midcontinent dropped 14.0 cents to $1.250.
NatGasWeather said that, overall, the Lower 48 would see “light to very light national demand” this week and through early March.
“A warm break will set up over much of the U.S. the next few days with highs of 40s-50s across the northern U.S. and 50s-80s over the central and southern U.S.,” the firm said Tuesday. “A cool weather system will track across the Midwest and Northeast this weekend with lows of 10s to 20s for a minor bump in national demand.”
But farther out, the North could enjoy mild highs of the 30s to 50s next week and for the start of March, the forecaster added, while the South “will be nice” with highs of 60s to 80s.
On the pipeline front, Wood Mackenzie analyst Kevin Ong noted Tuesday that, following other recent brief outages, El Paso Natural Gas Pipeline declared a force majeure on its Line 2000, limiting flows until further notice. The Line 2000 segment near Coolidge, AZ, delivers Permian flows west into desert markets.
Prices in the Southwest jumped Tuesday in response, with El Paso S. Mainline/N. Baja up 64.0 cents to $2.150. However, when Permian flows are slowed by maintenance, it creates a glut of gas in West Texas and often suppresses prices there. On Tuesday, Waha in West Texas fell 31.5 cents to 40.5 cents.
