The Monthly Natural Gas Market Newsletter - August 2022
FireSide Natural Gas Monthly Report - August 2022
Natural Gas Prices
NYMEX SEPTEMBER 2022
NYMEX September 2022 natural gas futures touched the $10.00 market on 8/23. This marks the first time that a prompt natural gas futures contract has breached the $10.00 level since 2008. While the move above $10 was shortlived, the market has clearly demonstrated that a move to this level is possible. Expiration of the September contract will happen on Monday 9/29. It's likely that the contract will settle in between the support levels identified by both the 10 day and 40 day moving averages seen at $9.20 and $7.91. The market continues to feel very "bullish" as concerns about storage inventories heading into winter 2022/2023 have started to surface more as we inch towards the heating season. With less than 10 weeks left in the traditional injection season, storage inventories are on pace to enter winter at their lowest levels seen in several years and well beneath the "normal" 4.0 TCF level.
NYMEX FORWARD CURVES
NYMEX forward natural gas prices remain in a condition of backwardation. Bal Cal22 is currently trading at a $2.814premium to prices for Cal23 and a $4.142 premium to prices for Cal24. Spreads for near-term prices to deferred prices are now at their widest levels since late May/early June. While most of the spread increases are linked to near-term contract pricing making a surge towards the $10.00 level, it should be noted that deferred pricing for 2023 and 2024 have appreciated in tandem albeit not at the same pace. With the fundamentals of the natural gas market still very tight, it's very probable that deferred prices will continue to rise higher over the next few months using 2022 price action as a guide for what to potentially expect.
US DAILY NATURAL GAS PRODUCTION
Daily dry natural gas production averaged 97.4 BCF/day in July. This compares to 97.1 BCF/day
in June and 93.6 BCF/day in July 2021. Daily production levels so far in August have averaged
98.6 BCF which is a record high average. The highest production day on record was recorded on
8/26 at 99.7 BCF. Natural gas production levels have finally started to grow at a noticeable level
after being stagnant for most of the summer. It's expected that natural gas production levels will
eventually cross the 100 BCF/day average on a consistent basis. This is likely to occur in the fall
time period and should continue to be the "normal" going into 2023. Most production gains have
been seen in the Permian Basin and Haynesville Basin. Daily production levels in the Permian
are currently around 21 BCF/day and the Haynesville around 15.7 BCF/day. This compares to
August 2021 levels of 18.7 BCF/day and 13.5 BCF/day for both basins respectively. The largest
production area in the US, the Marcellus, is currently producing 28.5 BCF/day. Daily production
levels here have only experienced moderate growth over the last few months. Pipeline capacity is
a problem in the Marcellus due to the lack of significant capacity additions over the last few years.
The next major pipeline project, the Mountain Valley Pipeline, will provide additional working
capacity of over 2 BCF/day but this project has been stalled in federal court despite being over
90% complete. Time will tell as to when MVP will finally flow gas to the Southeast region.
REGIONAL BASIS AND NATURAL GAS PRICING
While rising NYMEX natural gas futures pricing has recently gotten most of the news headlines, it's equally important to track how regional natural gas prices are trading as well. The NYMEX natural gas futures contract references the Henry Hub delivery point and acts as the "benchmark" price for natural gas in the US. The Henry Hub is a delivery point on the Sabine pipeline in southeast Louisiana. The value of natural gas is drastically different across all different market areas in the US. In determining the regional cost of gas, one most factor natural gas basis into the pricing equation. Basis consists of both the financial and physical value cost differences of natural gas prices as compared to the benchmark Henry Hub price. A clear example of how basis impacts regional natural gas prices is to look at the cost difference of natural gas for this upcoming winter (Nov-Mar) heating season. One of the main natural gas pipelines that delivers natural gas to market areas in the Northeast is the Algonquin Pipeline. Currently, winter prices for gas supply on Algonquin are trading at over $32/DTH. This compares to NYMEX winter pricing of just over $9/DTH. The northeast is a very regionally constrained market area as evidence by natural gas prices in this region being the most expensive in the US. Other market areas along the East Coast and in the Southeast are also experiencing historically high price premiums as well. Prices on Texas Eastern, which serves mid-Atlantic markets, are currently fetching over $14/DTH. Transco Zone 5, which acts as a primary pricing point for gas in the Southeast, is trading at over $16/DTH. While these market areas are all trading at heavy premiums to NYMEX, some market areas like the Chicago region, are trading flatter to the NYMEX. Chicago winter prices are trading at only about 50 cents over NYMEX as the region is much more liquid with the ability to receive natural gas from many different pipelines from different production areas plus the region's ability to import Canadian gas via pipeline as well.
NATURAL GAS STORAGE ANALYSIS
Natural gas storage helps "balance" the US natural gas market. The highest level of gas ever recorded in storage was back on
11/11/2016 at 4.047 TCF. The US market now considers near 4.0 TCF as the new "normal" for adequate levels of gas storage
entering the winter heating season. Inventory levels reached 3.958 TCF last November. Storage exited the 2020/2021 heating
season at 1.750 TCF. Natural gas storage ended the 2021/2022 heating season at 1,382 TCF. Current storage levels are at
2.579 BCF. This is 9.4% below year ago levels and 12.0% below the previous five-year average. Extreme heat has seen a record
amount of natural gas seen in the power generation sector. This is gas that traditionally would've been earmarked for storage
injection. With the dynamics of the natural gas market and demands for natural gas changing dramatically compared to in years
past, more focus is now being paid on both expected working levels of natural gas to start the heating season AND expected
levels of natural gas to start the injection season. Natural gas has shed its traditional label of being a "seasonal" energy
commodity. Current expectations for natural gas storage by November 1 are in the 3.4-3.5 BCF range. Inventory levels at or in
this range would be well below "expected" levels of 4.0 BCF for the start of winter.
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