Market Update: July 23, 2024

This Week's Update:

Natural gas pricing moved slightly higher last Friday, with Cals ’25- ’29 up three to five cents. The prompt month (Aug) contract was basically flat on the day, but was down $0.20/MMBtu week-over-week.

• Fundamentals:

  • Production is flat week-over-week

  • Demand has softened. Overall demand has fallen over 8.5 Bcf/d in the last seven days, stemming from lower power burn demand levels. LNG exports are starting to trend a little higher as Freeport volumes begin to climb, currently estimated over 11 Bcf/d for today

EIA/Gas Storage: For the week ending July 12, 2024, the EIA reported an injection of 10 Bcf into underground storage vs. an estimated injection of 27 Bcf. Inventories are 3,209 Bcf, 250 Bcf or 8.4% more than the same period last year and 465 Bcf or 16.9% more than the 5-year average

Weather impact:

• Hotter temperatures are expected to be localized to the West, while the South and East should see moderate to below-average temperatures for this week. Warmer-than-normal temperatures are forecasted to return to most of the country as July nears its end.

• Weather-driven demand is weak, especially in the critical South-Central region. The Southeast is expected to have near-normal temperatures, not enough to boost demand. This weak demand outlook is keeping natural gas prices low.

In short:

• NYMEX futures fell by 29.4¢/MMBtu (-13%) last week due to an extended outage at Freeport LNG, which has disrupted demand in an already struggling market. The ongoing effects of Hurricane Beryl are also impacting the market, with Freeport only partially restarting one LNG train and planning a slow restart for the other two. The terminal might operate at a reduced rate for an unknown period due to repairs, causing further market instability. Hurricane Beryl’s demand losses could be as high as 50 Bcf, much more than initially predicted. Freeport LNG’s timeline for returning to full operation is now a key factor for NYMEX futures.

• The recent end of a heat wave has decreased power sector gas demand, pushing Henry Hub spot prices below $2.00/MMBtu. Weather forecasts have reduced demand by 47 CDDs in the past month, leading to a negative outlook for NYMEX futures. Technical analysis indicates potential support at $2.00/MMBtu, but prices could fall further to $1.84/MMBtu.

• With the market acutely focused on oversupply concerns, key medium-term drivers—including the timing of Freeport’s return and hurricane risks—may each cause ongoing drag on the NYMEX curve over the next 30-45 days.

• Flipping the script slightly from last week – Based on current outlooks, we foresee a likely scenario in which NYMEX prices struggle to rebound (increase) in the immediate term due to decreased demand (cooler weather + outages from Hurricane Beryl). Beyond the immediate term, we hold a slightly bullish outlook, believing that NYMEX prices will rise over the next 30-45 days, but not nearly to the extent that was once predicted due to weather – Storage surpluses should hinder pricing upside into the fall. With Gas currently cheap, and with an outlook that projects limited upside into the fall, we are in a great spot for clients to add to their portfolio.

In Depth:

Near Term:

• Freeport LNG is once again a focal point due to its history of long outages and unreliable timelines. The facility has already experienced a 21 Bcf demand outage from Hurricane Beryl, and current feed gas demand is under 0.4 Bcf/d, less than 20% of its capacity. The two offline LNG trains are expected to return slowly and will operate at reduced rates initially, with no clear timeline for full service restoration.

• The natural gas market is oversupplied, and fears of storage issues in autumn are driving prices down. Henry Hub spot prices dropped to $1.80/MMBtu before Hurricane Beryl, indicating the market’s struggle for demand. Freeport’s extended outage is contributing to this bearish trend.

• Efforts to reduce the year-over-year surplus may stall until August. Despite low natural gas prices boosting demand and slightly reducing production, the storage surplus from May and June might not decrease significantly in July due to the extended Freeport outage and mild weather. A return of heat in August and Freeport’s recovery might eventually tighten the market, but the near-term outlook remains challenging.

• DTN’s 16–30-day forecast predicts very hot temperatures across the Midwest and Mid-Atlantic, averaging 93 CDDs/week nationally. However, this northern heat may not significantly increase power demand. The market may wait for closer heat forecasts before reacting. A warming trend is expected towards the northern US, which could trigger higher demand if it arrives.

• There are also risks of continued cooler temperatures in the central and eastern US, posing downside risks for NYMEX futures. Additionally, hurricane risks may increase in mid-August, and any developing storm in the Atlantic Basin could significantly impact the market.

30-45 Days:

• August weather will play a crucial role in determining NYMEX prices in the next 30-45 days, but deepening oversupply might hinder recovery. The current storage surplus, at 3,199 Bcf, could cause problems in managing oversupply in autumn. However, very low injections in late July and August due to expected record heat might keep storage below 3,350 Bcf by the end of August, easing some pressure.

• Key market drivers like Freeport LNG’s return and hurricane risks may lead to bearish trends. Freeport’s multiple outages and slow return to full service could keep NYMEX futures low. The impact of Hurricane Beryl may cause the market to overreact to any tropical storm threats, especially as hurricane season peaks in September.

• Despite the oversupply, the market aims to avoid storage containment issues this autumn, setting the stage for a recovery once these concerns subside. The EBW forecast projects 3,859 Bcf in storage by the end of October, manageable but still above average levels. Challenges may arise from prolonged Freeport outages, deteriorating weather, or renewed hurricane risks.

• Historically, the market has managed to clean up excess supply, allowing NYMEX prices to rise by October. Henry Hub spot prices have averaged at least $2.42/MMBtu every October since 2000. If October 2024 is not the lowest price in 25 years, prices might average at least 10% above the current $2.201.

• Other scenarios could favor bulls: in 2020, clearing a rock barge boosted demand and prices. A cold late October or early November can shift market focus to winter weather risks. Even last year, a short squeeze pushed December contract prices to $3.575/MMBtu by October 31st despite oversupply.

Natural Gas Prices:

For contracts expiring in next 3 months (or NMR):

• Why buy now? – DRT for 12-Month contracts starting in Aug and Sept below:

• General info regarding the start date: Aug down ~$0.006 /Therm, Sep down ~$0.005 /Therm.

For contracts expiring in 9-12 months:

• Why buy now? – Gas 2025 renewals are still near their lowest since Jul ‘22. The contract price fell $0.003/ Therm since the last update (7/15/24)

Electricity – Cooling Demand Drop to Ease Soaring Prices

• A mid-July heat wave in the Mid-Atlantic and Northeast caused day-ahead prices at PJM West to reach $169.88/MWh last weekend, with ISO-NE averaging $109/MWh the week of July 8th. However, cooling demand has decreased since then, potentially leading to much lower day-ahead power prices over the next 7-10 days in the Northeastern US.

• The slow power restoration in CenterPoint’s Houston area after Hurricane Beryl is another significant story. Ten days after the storm, over 50,000 customers were still without power. Industrial demand outages and complex restart procedures may lead to further demand-side issues. With three more months of hurricane season, additional disruptions in the Gulf Coast, Florida, and the Southeast are possible.

• National cooling demand is expected to continue to decrease in the near term, leading to a rapid decline in power sector gas burns. Although demand may increase week-over-week, this week could see a decrease of nearly 2.0 Bcf/d, even after accounting for recovering demand post-Beryl in ERCOT.