FireSide Natural Gas Monthly Report - December 2022

Natural Gas Prices

NYMEX JANUARY 2023

NYMEX January natural gas futures closed the week down $1.521 at $5.079 heading into the long Christmas holiday weekend. After gapping down 45 cents on the open Monday morning, the contract continued to slide all week eventually hitting a low of $4.825 on Friday in thin market trading. The sub $5.00 print is the first time that the contract has been below this level since March 2022. With daily natural gas prices at most major trading hubs across the country exploding higher due to the extreme cold weather that the country has been experiencing over the holiday, the January futures contract was more influenced by the extreme warm-up in temperatures expected by the end of the month. Based on the most recent weather forecasts, countrywide weather is expected to reach well above normal levels and possibly challenge the warmest weather seen for early January in over 40 years. As the January contract heads into expiration later this week, the probability of seeing a sub $5.00 settlement is very high.

NYMEX FORWARD CURVES

NYMEX natural gas futures have been on a whirlwind ride for 2022. Contract months in 2022 showed extreme backwardation to forward NYMEX future price curves. NYMEX 2023 prices have demonstrated periods of steep backwardation at certain periods of time during 2022 but the spreads have completely collapsed over the last few weeks. The premium of Cal23 to Cal24 has shrunken to only 22 cents while the premium of Cal23 to Cal25 is now just 11 cents. While the erosion of the price spread can largely be attributed to the drop in front month contract values, it should be noted that gains have been seen in the longer-dated price curves indicating that a tightening of the forward futures market is to be expected and a possible contango trading situation for 2023 contract prices could manifest.

NATURAL GAS SUPPLY - US DAILY NATURAL GAS PRODUCTION

Daily dry natural gas production averaged 100.7 BCF/day in November. This compares to 100.7 BCF/day in October and 96.4 BCF/day in November 2021. Daily production levels so far in December have averaged 99 BCF and are being impacted by wellhead freeze-offs in many of the major production regions. With below freezing weather conditions occurring across the country, wellhead freeze-offs have reduced working natural gas production levels down to just under 85 BCF/day. This marks the lowest daily levels of production seen since February 2021 when Texas and several mid-continent states dealt with winter storm Uri and its deadly cold weather. With weather temperatures expected to steadily improve this week and returning to normal and then well above normal to start 2023, daily production levels should rebound quickly. Prior to the cold weather arriving, daily production levels were averaging about 101 BCF/day thus far in December. Since the end of September, the average daily production level has been above 100 BCF. At the start of 2022, daily production levels had averaged about 94 BCF/day. Production growth has experienced about a 7% gain in 2022 as the year progressed. Based on the working rig count and expected well completions to occur in early 2023, it's probable that the explosive growth in natural gas production will continue in 2023. This growth is needed to try and match demand which is also projected to continue to grow in 2023. It's likely that the Permian, Haynesville and Eagle Ford production areas will be the ones driving growth. Takeaway capacity in the nation's largest production region, the Marcellus, remains a critical concern. The region was delt another major setback last week when the Mountain Valley Pipeline experienced yet another legal below delaying, yet again, the completion of the project.

US DAILY CASH NATURAL GAS PRICES

Daily natural gas prices in the US have spiked dramatically over the last few days as severe winter weather is being felt across most major consuming regions. Prices in the constrained Transco Zone 5 region of the Southeast surged to over $57/DTH making it the most expensive natural gas in the country for the long holiday weekend. This marks the highest price levels seen for Transco Zone 5 since Winter Storm Uri in February 2021 pushed prices above $100/DTH. Price points in the Mid-Atlantic and Northeast regions have also surged. Prices in the Iroquois Zone 2 region, which serves the NY market area, were trading at over $30/DTH and prices at TET M-3, in the Mid-Atlantic, were seen at over $27/DTH. As these regions have been constrained over the last few years due to increased demand for natural gas and not enough pipeline infrastructure being built to support the demand growth, periods of extreme price spikes have been seen on occasion. Other major market areas like the Chicago Citygate in the Midwest, where access to natural gas comes from many different pipeline systems (including imports from Canada), prices were also up trading at over $8.00 but not nearly as expensive as those seen in the Southeast and Northeast markets. Daily natural gas prices in California have been soaring all month long as below normal weather coupled with pipeline capacity issues on the El Paso Pipeline (a key pipeline serving the state) have kept natural gas prices in the region above $30/DTH for the last few weeks. Prices at the SoCal Edison Citygate reached a high of $56/DTH earlier in the week but dropped significantly before the holiday weekend as weather improved and the pipeline issues on El Paso were resolved. Pipeline infrastructure issues will likely continue to play a major role in natural gas price volatility in the US for years to come.

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 3,325 BCF. This is 1.3% below year ago levels and .7% above the previous five-year average. For the week ending 12/16, the EIA reported the largest withdrawal of the heating season thus far at 87 BCF. Mild weather to start the heating season had prohibited any major storage withdrawals thus far. However, that's likely to change when the EIA releases its next report on Thursday for the week ending 12/23. Early expectations for this report indicate a withdrawal of around 180 BCF. While this would be considered a sizeable withdrawal at any point during the heating season, the market will be strongly paying attention to the EIA's report next week when the reporting week ending 12/30 is released. This report is likely to be one of the largest seen over the last few years as extreme cold weather coupled with a drop in available natural gas production will have utility systems across the country relying heavily on storage to meet heating demand.