FireSide Natural Gas Monthly Report - July 2022

Natural Gas Prices

NYMEX AUGUST 2022

NYMEX August 2022 natural gas futures are trading at their highest level since mid-June after the Freeport LNG facility reported a fire that knocked the export facility off-line. The facility had been consuming over 2 BCF/day of natural gas that has since been dumped back into the domestic market. The facility's outage was a bearish market indicator that many thought would help ease the very tight supply vs demand balance in the market that had been the primary driver of price strength. While the news of the outage dropped natural gas prices below the $6.00 level, sizzling summer heat in many parts of country are requiring historic levels of natural gas usage for power generation needs. The "excess" gas from the Freeport outage was supposed to help pad gas storage and provide some cushion. But sustained demand for air conditioning load has reminded traders of the delicate fundamental landscape of the market.

NYMEX FORWARD CURVES

NYMEX forward natural gas prices remain in a condition of backwardation. Bal Cal22 is currently trading at a $2.523 premium to prices for Cal23 and a $3.515 premium to prices for Cal24. Back in mid-June, these spreads were $1.482 and $2.108 respectively. Price spreads have been blowing out over the last few weeks as the front month natural gas contract prices have been bid up as demand from the power generation sector has been at historic high levels. It's likely that spreads might weaken some as the market heads into the fall time period. However, the market remains fundamentally bullish and the heavily discounted prices for calendar year 2023 and 2024 currently provide excellent levels to hedge future natural gas needs to mitigate future price risk.

NATURAL GAS SUPPLY - US DAILY PRODUCTION

Daily dry natural gas production averaged 96.8 BCF/day in June. This compares to 96.2 BCF/day in May and 93.2 BCF/day in June 2021. The latest Baker Hughes rig count shows that natural gas rigs that are actively looking for natural gas now stands at 155. This compares to 104 rigs for this same reporting week last year. An examination of the Baker Hughes rig data suggests that it's possible that the accelerated rig growth that the natural gas market has seen since the beginning of the year might be slowing down. At the start of 2022, 106 rigs were actively looking for new natural gas supplies. The first quarter showed a growth of 32 rigs. The second quarter showed a growth of 23 rigs. Supply chain issues and labor shortages in the energy services sector appear to be hindering drilling and well completions. Meanwhile, Drilled but Uncompleted (DUC) wells are at their lowest level since recording of this metric began in 2014. Essentially, it has been easier for natural gas producers to use their existing inventory of previously drilled wells to add natural gas supply than it has been to drill, complete and bring on new supply sources. While this has helped natural gas producers somewhat increase total production levels, additional gas supplies have been more so to help offset producing wells that are starting to show depletion in their production levels. It has been expected that daily production growth might exceed 100 BCF/day this summer, but it appears that this target might be hard to hit at this time.

POWER GENERATION

Daily demand from the power generation sector for natural gas recently hit a record of over 46 BCF/day. The previous record of 45 BCF/day was seen in July 2020. With natural gas becoming a larger component of the overall power generation mix in the US, the influence that power generation demand has had on natural gas prices is easy to see. Front month August natural gas futures plummeted to a low of $5.30 ahead of the 4th of July holiday weekend. August prices had been trading above the $9.00 level in early June before the Freeport LNG fire shut down the facility. August futures dropped almost $4.00/DTH in a two-week span after it was announced that the Freeport facility would be offline until the fall. After the long holiday weekend, more "summer-like" weather began to creep into major market areas of the US. As weather heated up, so did the need for air conditioning demand. As demand for electricity stated to ramp up, natural gas prices have followed suit. August future prices have gained over $3.00/DTH in the last two weeks to match the rise in natural gas usage by power generators. Many Independent System Operators of power grids across the country have been warning customers of potential blackouts or rolling brownouts from the strain that power grids are experiencing. Power generators that have the luxury of fuel switching between natural gas and coal can't effectively do so this year. Coal prices are at their highest level in over a decade and inventory of coal supplies is at its lowest level in 20 years. As tight as the natural gas market has been this year, the coal market is even tighter. With weather forecasts continuing to show expectations for sustained heat, it's possible that the current record for power generation demand will be broken in the coming weeks.

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 2.401 BCF. This is 10.1% below year ago levels and 12.0% below the previous five-year average. Natural gas storage levels have been improving over the last few weeks. The Freeport LNG outage helped storage injection levels in June and early July. However, with power generation demand at record high levels, less natural gas supply is making it into storage for the 2022/2023 winter heating season. The most recent EIA storage report for the week ending 7/15 showed an injection of only 32 BCF. Injection levels are likely to remain low over the next few weeks as the outlook for above-normal weather continues for many areas of the country. Expected heating season starting storage levels look better than they did back in the springtime. Analysts are expecting levels near 3.500 BCF but still below the optimal 4.000 BCF level.

World's Growing Thirst for American Gas Tests U.S. Ability to Meet Demand - WSJ

Heat Wave Sends Natural-Gas Prices Soaring - WSJ

Weak Storage Injection Reignites August Natural Gas Futures - Natural Gas Intelligence

Natural Gas Futures Fly Back Above $8 Amid Relentless Heat, Storage Concerns - Natural Gas Intelligence

US Natural Gas Prices Re-Spike, after the Big Plunge | Wolf Street