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The Monthly Natural Gas Market Newsletter - January 2023

FireSide Natural Gas Monthly Report - January 2023

Natural Gas Prices


NYMEX February natural gas futures settled down 52.1 cents on the week at $3.174. The prompt month futures contract is at its lowest price level since the summer of 2021 when the July 2021 NYMEX contract was seen trading in the same range. The February contract traded in a 69-cent range for the week reaching a high of $3.78 and a low of $3.09. The contract experienced 5 consecutive days of losses last trading week. With the lack of any sustained winter weather to stoke heating demand, the February contract has lost almost $2.00 in value since taking over as the prompt month NYMEX contract at the end of December. With contract expiration occurring this Friday the 27th it's possible that the February contract could see a price print in the upper $2.00 range as the path of least resistance for pricing appears to be lower. While the February contract is technically oversold and a possible price correction could occur this week, the lack of near-term fundamental support will likely prevent any major upwards movement in price.


NYMEX Bal Cal 2023 natural gas futures continue their recent trend of trading in contango to the longer dated 2024 and 2025 forward price curves as opposed to their backwardation trading pattern for all of 2022. With the lack of any meaningful fundamental support for natural gas prices, 2023 NYMEX prices have slipped to trading 57 cents below 2024 prices and almost 80 cents below 2025 prices. With longer-dated prices now commanding a price premium, NYMEX natural gas futures pricing is indicating that a tightness in the market is expected to reappear over time with regards to the supply vs demand balance for natural gas.


Daily dry natural gas production averaged 97.8 BCF/day in December. This compares to 100.0 BCF/day in November and 97.0 BCF/day in December 2021. Daily production levels so far in January have averaged 101.5 BCF after shaking off the effects of well-freeze offs seen in late December. With extremely mild weather expected for the next few weeks, it's expected that no additional weather-related daily production declines will be seen. At the peak of the extreme but short burst of cold weather that engulfed most of the US before the Christmas holiday period, daily production levels dipped to a low of 83.4 BCF on Christmas Eve. By the start of the New Year, production rose back above the 100 BCF level posting a high of 102.2 BCF on 1/14 which marks the highest daily output ever for domestic natural gas production. The current Baker Hughes rig count data for the week ending 1/20 indicated that 156 rigs are actively drilling for natural gas supplies. At its peak in 2022, the rig count was at 166 active rigs in September. At the beginning of 2022, the active rig count was 107 rigs. While the rig count has increased by 45% since the start of 2022, the current count is far below the all-time high of 202 rigs in January 2019. Supply chain issues and pipeline constraints impacting takeaway capacity have prevented the current rig count from potentially soaring even higher. Weak near-term natural gas prices could also potentially impact the rig count from growing too much as there's less incentive for natural gas producers to bring on new supply to increase the existing surplus that the market is currently experiencing. With forecasted demand expected to increase and forward prices trading at a premium to near-term prices, the rig count level might drop a little or at the very least remain stagnant over the course of the next few months.


Fears about winter shortages of natural gas have faded considerably over the last 6 weeks. The premium commanded for gas delivered in Marth rather than April, which essentially is a trader's bet on how tight natural gas supplies will be by winter's end, dwindled to nothing on Friday. Known as the "Windowmaker" spread for its notorious volatility, the price spread between the NYMEX April and March 2023 contracts had been as wide as over $2.00/DTH earlier in 2022 and was the highest spread level seen in over a decade for these contract months. The peak of the price spread occurred as fears of the Ukraine/Russia war sparked concerns about widespread natural gas shortages during the coldest time of the year. But, with the lack of sustained cold weather, hedge funds have been slashing bullish positions and have adopted a much more bearish stance about what near-term natural gas prices will look like. In addition to the lack of weather-related demand, the natural gas market is suffering from a record high amount of natural gas supply which means that utilities, natural gas brokers and marketers aren't having to lean on underground storage supplies as much as previously expected. The continued outage of the Freeport LNG facility also has contributed to the price spread collapse. At its peak, the Freeport facility was exporting over 2 BCF/day of liquified natural gas. A fire at the plant in the middle of June has caused this natural gas supply to be returned to market where it's been both injected into storage and used to offset summer demand for natural gas from power plant operators. Despite expectations that the Freeport plant would return to service sometime in Q4, the plant has failed to meet all of the government mandated requirements to return to service. The latest update from the plant indicates a possible return to service in February as the traditional heating season starts to wind down.


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 2,820 BCF. This is .7% below year ago levels and 1.2% above the previous five-year average. For the week ending 1/13, the EIA reported a withdrawal of 82 BCF. Much colder-than-normal weather from December 16th thru December 30th pushed storage inventories from 22 BCF above the five-year average to 208 BCF below the five-year average. Much warmer weather in January has flipped that deficit to a surplus per this week's EIA storage report. With mild weather forecasted for the next two weeks, it's possible that the surplus to the five-year average could grow to 140-150 BCF to close out the month.