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The Monthly Natural Gas Market Newsletter - October 2022

FireSide Natural Gas Monthly Report - October 2022

Natural Gas Prices

NYMEX NOVEMBER 2022

NYMEX November natural gas futures experienced the largest weekly sell-off seen for a prompt month contract since early June when the closure of the Freeport LNG facility was announced. The contract shed almost $1.50/DTH this week to close at $4.959. This marks the first time that a prompt month contract has settled below $5.00 since the Apr22 contract closed at $4.90 back on 3/21. Since peaking at $10.01 on 8/23, the November contract has lost over $5.00 of its value. Improvements in natural gas storage levels heading into the winter heating season coupled with increasing daily production levels along with a decrease in power generation demand, as the shoulder season sets in, have all contributed to the sharp decline in natural gas prices. The November contract has now entered a condition of being severely oversold and a technical bounce back correction likely looms before the contract's expiration.

NYMEX FORWARD CURVES

NYMEX forward natural gas prices remain in a condition over backwardation but the spread to longer-dated prices has shrunken considerably over the last few weeks. The spread of bal cal22 futures to cal23 prices sits at just 36.5 cents while the spread to cal24 is now just 73.1 cents. The price spread between 22 and 23 prices had been as wide as almost $3.00 less than a month ago. With improving fundamentals, risk premiums on near-term contract months have almost evaporated completely. While 2022 prices have been cratering over the last few weeks, prices in 2023 and 2024 have been down as well but not nearly to the same degree indicating that longer´┐żterm sentiment is that tightness in the natural gas market is expected to persist.

US DAILY NATURAL GAS PRODUCTION

Daily dry natural gas production averaged 100.9 BCF/day in September. This compares to 98.9 BCF/day in August and 95.0 BCF/day in September 2021. Daily production levels so far in October have averaged 101.4 BCF which is a record high average. A new daily production record was established on 10/3 when 103.4 BCF/day was seen. While this remains the highest daily total thus far in October, it's widely expected that another new daily high will be hit soon. It's been estimated that daily production levels could exceed 105 BCF/day before year's end. This would represent almost a 10% YOY increase in daily natural gas production. A sharp increase in drilling rigs began to take shape back late 2021 and early 2022. Daily rig data indicated that 107 active rigs were working to start the new year. The rig data has steadily been increasing almost every week since posting a high of 166 rigs back on 9/9. The current active rig count sits at 157 for the week ending 10/14. While well completion rates have been slower than normal due to supply chain issues and a shortage of trained oilfield services employees, daily production levels have finally started to react to the surge in drilling activity. It's expected that daily production levels will continue to steadily increase not only for the remainder of 2022 but into 2023 as well. This should help improve the supply demand fundamentals that had been so out of whack for much of 2022 but the natural gas market is unlikely to return to the very loose condition that it had experienced in years past where production far exceeded demand.

NATURAL GAS STORAGE INJECTIONS

Natural gas storage inventories play a key role in balancing the US natural gas market. Daily natural gas demand often exceeds available daily natural gas production and storage gas is used to meet periods of heightened demand. This mostly occurs during the peak winter season when heating demand is needed the most. Historically, the spring, summer and fall months are the times when natural gas is injected into storage caverns across the country in anticipation of this gas being withdrawn and used in wintertime. However, recent increases in year-round demand to meet needs for both power generation and natural gas exports (in the form of pipeline gas being delivered to Mexico and LNG being sent to Europe and Asia) has started to compete for natural gas that's supposed to go into storage to refill inventory levels ahead of winter. Storage levels were extremely low heading into this year's injection season (under 1,400 BCF). Normal expectations are that storage levels need to be near 4,000 BCF to meet the demands that could come from a harsh winter. With a fundamentally tight natural gas market, reaching adequate storage levels ahead of the 2022/2023 winter heating was a major concern and helped push natural gas prices to their highest levels seen in over a decade. Thus far, storage has been replenished at a surprisingly fast rate. Expectations are that inventory levels will improve by over 2,100 BCF by November 1 putting storage above 3,500 BCF. While still below normal levels, this is vastly different than original projections indicating a starting storage level of barely above 3,200 BCF back in the spring. It's been almost 100 days since the Freeport LNG facility has been offline due to a fire. With a daily demand that averaged 2.2 BCF/day prior to the fire, over 215 BCF of gas has been put back into the domestic natural gas market thus far and has helped stave off major storage concerns ahead of winter which has resulted in near-term natural gas prices shedding their risk premiums. The facility is scheduled to return to service in November and should ramp up to maximum levels of exports before the end of the year. While natural gas storage levels appear to have dodged a bullet for this winter season, a fundamentally tight natural gas market should persist in 2023 which is likely to raise concerns about how storage will look heading into the 2023/2024 winter heating season.

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 3,342 BCF. This is 3.1% below year ago levels and 5.2% below the previous five-year average. With increasing daily natural gas production and LNG exports still lower due to the Freeport facility outage, weekly natural gas storage injections have been coming in stronger than previously anticipated. More domestic gas supply making its way into storage has helped inventory levels catch-up to year ago levels. The deficit to last year's level has started to narrow and it's possible that inventory levels could catch-up before the start of the heating season. The market is currently expecting a possible injection of 70 BCF for this week's report. Current expectations for natural gas storage by November 1 are in the 3.5-3.6 BCF range. Inventory levels at or in this range would be below the "expected" level of 4.0 BCF for the start of winter.

ENERGY RELATED ARTICLES AND STORIES

Natural Gas Futures Plunge Below $5 as Weather, Fundamentals 'Bad as You'll Ever See' - Natural Gas Intelligence

Natural Gas Tries To Settle Below $5.00 (fxempire.com)

Nymex Natural Gas Futures Curve Disintegrates on Moderate Weather, Rising Storage Trajectory - Natural Gas Intelligence

Natural Gas Weekly, Futures Prices Freefall as Bears Feast on Mild Weather, Robust Supplies - Natural Gas Intelligence