Henry Hub natural gas prices are currently trading down almost 15 cents with the most traded August ’22 contract at $6.143 MMBTU. The entire forward curve is down, with couple different trends to stress (see the graph below) compared to almost a month ago: (1) the strong backwardation we had a few weeks ago, if we consider all the Cal’22 (calendar’22) has gone away.
If we compare the week of May 4th with the current one, we see a change of the curve shape in Cal’22 from a decent backwardation to a flat/contangoed one; (2) the strong winter premium, the so-called ‘widow maker’ spread H/J 2023 (March/April’ 23) has almost halved from $1.9 to $1 right now. These elements tell us that the situation of Henry Hub market has become less tight, or better less precarious than a few weeks ago.
There have been a few factors having a huge impact on the Supply/Demand balance and the trajectory of End of Season storage. The first, and maybe the most important one, was the well-know Freeport explosion. On the technical side, Freeport was able to export 2.2 billion of cubic feet a day (bcf/d) in terms of LNG. This was a good percentage considering the maximum capacity of LNG exports for US this year just below 14 bcf/D. The pure math tells us that if (and this is a big IF) the shut down is for about 100 days (I personally think it’s just a floor), we have to add 220 bcf to our End of Season storage model. I personally was close to 3.2 trillion cubic feet (tcf) for that, now I’m more close to 3.45 tcf. I do think this is not a comfortable level by any chance, however 220-270 bcf give for sure a sense of relief to the market.
This ‘accident’ however had a huge impact also on TTF European gas prices, since 60% of overall Freeport export was directed to Europe. This is part of the TTF spike up to euro 185 MwH. The second is related to supply. During last couple weeks, we had a US lower 48 production increase, up to reach year to date high readings around 97.2 bcf. This is a decent production reading that I expected in Q3, however we need to understand if we are able to keep it during next weeks. The other components of the demand side remains pretty good. Even if not ‘off the charts’, power burns readings averaged well over 40 bcf/d, a good value weather adjusted.
This pattern clearly shows the fact that the classic gas to coal switching is not a factor anymore, even at pretty high prices.
Then the weather. Over the next couple weeks, we will have above normal demand in terms of cooling degrees as you may see in the charts below. Barring euro and gfs ensemble run-to-run variations, we will have well above 30 year average demand, with a strong ridge over the south for the next 3-5 days (see the third chart below). Then for the second week (first chart) we will have slightly above normal temperatures over most of the US. This will have a decent impact on the next 3-4 storage numbers.
And finally the storage number, yes the big issue. Over the last 3 weeks, EIA has given storage number difficult to interpret, not in line with my model (and with most of the analysts), showing first a ton of loosening, then, suddenly, yesterday a ton of tightening. Indeed, as you may see below, yesterday EIA printed 60 bcf injection, versus my forecast at 73 bcf (close to all analysts’ estimates). This number is pretty tight in any metric, week over week, versus the other 4 weeks’ average. And this poses further risk for End of season storage trajectory, even without Freeport, especially if we keep this hot pattern in US. So, what’s next? Maybe EIA will help us in the next coupe printing.
Associate Professor of Banking and Finance, Università Cattolica del Sacro Cuore
Natgasweather and Energy Working analyst
This article was written by Ryan Paisey at www.forexlive.com.
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