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 longerterm 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 Tries To Settle Below $5.00 (fxempire.com)
