FireSide Natural Gas Monthly Report - June 2022

Natural Gas Prices

NYMEX JULY 2022

NYMEX July 2022 natural gas futures have dropped to their lowest level since early May. The contract posted a fresh 14 year high of $9.664 on 6/8 but has lost $2.72 or 28% in value over the last trading week. The contract had a sharp reversal in trade on the same day that prices reached their recent high. News that a fire at the country's 2nd largest LNG export facility shut down operations triggered the sell-off. Original expectations were that the fire would result in a downtime of 3 weeks in operations. However, it was announced this week that the facility would be closed until the fall. The Freeport LNG export facility produces over 2 BCF/day of LNG. The natural gas used at the facility will now be returned to the US natural gas market. While the US market remains tight, the additional supply provides some relief and will help both storage demand and demand from the power generation sector.

NYMEX FORWARD CURVES

NYMEX forward natural gas prices remain in a condition of backwardation. Bal Cal22 is currently trading at a $1.482 premium to prices for Cal23 and a $2.108 premium to prices for Cal24. Back in mid-February, these spreads were $.704 and $1.121 respectively. The drop in prices over the last trading week has caused the price spreads to narrow significantly. While the entire forward price curve for natural gas futures was pressured lower last week, most of the price movement occurred in the more near-term contracts for balance of 2022 and winter 2023 months. This drop in prices provides an excellent opportunity for customers to either start or add positions to a long-term hedging strategy.

NATURAL GAS SUPPLY - US DAILY PRODUCTION

Daily dry natural gas production averaged 96.1 BCF/day in May. This compares to 96.0 BCF/day in April and 93.0 BCF/day in May 2021. The latest Baker Hughes rig count shows that natural gas rigs that are actively looking for natural gas now stands at 154. This compares to 97 rigs for this same reporting week last year. At this time last year, daily natural gas production was around 93 BCF/day. Production growth continues to come from both the Permian and Haynesville shale regions. The Permian basin is currently producing over 20 BCF/day and the Haynesville is producing over 15 BCF/day. In June 2021, the Permian was producing just under 18 BCF/day and the Haynesville was producing just over 13 BCF/day. The largest producing region in the US, the Marcellus has seen daily natural gas production levels drop so far in 2022. The Marcellus is currently producing just under 28 BCF/day and is down from almost 30 BCF/day at the start of the year. The lack of take-away pipeline capacity in the region continues to keep gas production in the Marcellus from materially improving. Pipeline capacity growth in Texas and Louisiana, where the Permian and Haynesville basins are located, to meet the demand for US LNG export has been the key driver in production gains. With global LNG prices soaring higher, growth within these basins should continue to be seen. It's also expected that the Eagle Ford shale basin which currently produces almost 6.5 BCF/day could also experience production growth to help meet LNG export demand. The region was producing 5.8 BCF/day last June. The lack of takeaway pipeline capacity in other areas of the country continues to be a problem for many market areas.

LNG EXPORTS

Daily LNG exports have dropped to under 11 BCF as the news of the Freeport LNG facility's extended closure sent natural gas prices spiraling lower. The facility experienced a fire on 6/8 and immediately ceased operations. It was originally believed that the fire only caused minimal damage and that operations would only be temporarily closed for 3 weeks. However, company officials announced this week that the export facility wouldn't return to full operations until sometime in the fall. The Freeport facility had been producing over 2 BCF/day of LNG prior to the fire. Freeport is the 2nd largest LNG export facility in the US and 7th largest in the world. With all other US export facilities already at maximum operations due to the global demand for LNG, natural gas that was to be used by the Freeport facility is now being dumped back into the US natural gas market for use. The domestic natural gas market has been extremely tight for the last year. This additional supply will provide some relief as these molecules can now be used to help either increase natural gas storage or be used to meet demand from the power generation sector. While the announced extended closure of the Freeport facility caused domestic natural gas prices to plummet, the announcement had the opposite effect on global natural gas prices. Benchmark European prices jumped to over $35/DTH and Asian prices jumped to over $38/DTH. These are the highest levels seen since late March. Europe continues to feel the impact of reduced natural gas supplies from Russia's invasion of Ukraine and Asian demand has been soaring as of late. The removal of 2 BCF/day of LNG that was destined for these markets couldn't have come at a worse time for these overseas markets. The recent events with Freeport further highlight how domestic natural gas plays such a major role globally.

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 2.095 BCF. This is 13.6% below year ago levels and 13.4% below the previous five-year average. In May, 334 BCF was injected into storage. This compares to 355 BCF injected in May 2021. For the week ending 6/10, the EIA reported an injection of 92 BCF. The weekly report also reflected revised storage estimates for previous reporting weeks and added some extra volume to storage. The early estimate for the week ending June 17 is an injection of 62 BCF. The temporary closure of the Freeport LNG export facility is the biggest natural gas news of the week. With over 2 BCF/day of natural gas supply being returned to the domestic US market, it's believed that most of this supply could find its way into storage. Depending on when the facility comes back on-line, storage levels could improve by 200-300 BCF over the next few months.

ENERGY RELATED ARTICLES AND STORIES

Russia again cuts natural gas exports to European countries - ABC News (go.com)

Triple whammy for European gas supplies sends prices soaring - CNN

Russia sends alarm bells ringing over Europe's winter gas supplies (cnbc.com)

Global Natural Gas Prices Soar on Freeport LNG, Russian Outages - Natural Gas Intelligence

Natural Gas Futures Swoon to Close Wild Trading Week; Cash Clunks - Natural Gas Intelligence

Natural gas plummets as Freeport delays facility restart following explosion (cnbc.com)