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The Monthly Natural Gas Market Newsletter - September 2021

FireSide Natural Gas Monthly Report

Natural Gas Prices


NYMEX September 2021 NYMEX natural gas futures settled at $4.396 after posting an impressive 10% price gain since taking over as the prompt contract month at the end of July. The rally in prices was attributed to bullish fundamentals as the supply vs. demand balance for natural gas remains tight. The contract also got a boost from technical traders looking to ride the recent price momentum in natural gas to fresh multi-year highs. With winter looming and storage balances looking adequate but lower than normal and with global natural gas prices at historical highs, there's plenty of upside left in natural gas prices over the next few months.


NYMEX forward natural gas prices remain in a condition of backwardation. Prices for the remainder of 2021 are trading at $5.18 while 2022 prices are discounted by $1.15 cents at $4.03. Prices for 2023 are discounted even further and are trading at $3.23. The discount implies that the existing "tightness" seen in the natural gas market will improve as the years go on. However, producers have been diligent about drilling budgets and a more focused effort on increasing shareholder value. For budget-oriented end-users, taking advantage of the discounts that deferred years currently offer would be a prudent way to manage future price risk.


Daily dry natural gas production averaged 92.2 BCF/day in August. This compares to 92.2 BCF/day in July and 89.5 BCF/day in August 2020. For 2021 thus far, the average has been 91 BCF/day. Daily output peaked at 93.4 BCF but storm activity in the Gulf of Mexico from Hurricane Ida shut-in most of the daily output of natural gas in the Gulf towards the end the month. While the majority of natural gas is now sourced from oh-shore shale plays, the Gulf still provides about 2.5 BCF/day of production output. Given how tight natural gas suppliers are vs existing demand levels, the loss of even a small amount of daily gas supply would be considered a bullish event. Natural gas producers have managed to be very diligent in regard to drilling spending and bringing new natural gas supply to market despite very favorable pricing. Wall Street investors who've been plagued with little to no returns from shale drillers over the last decade have firmly made their intentions known that returning shareholder value trumps attempting to gain market share. While modest gains in production is expected in Q4 and into 2022, the natural gas market is expected to remain tight for the foreseeable future as producers appear less likely to fall into old habits of just drill, drill, drill.


Natural gas has become a major input fuel for electricity generation in the US over the last decade. As more and more legacy coal and nuclear plants have shut-down, natural gas has helped fill the void to those traditional baseload generation sources. In 2019, natural gas eclipsed coal as the most dominant fuel source for power plant producers. Natural gas appears like it will hold this lead position in the generation fuel stack for years to come. More and more coal fired plants are scheduled to be retired in the coming years. In the last 10 years, over 10,000 MW of coal plants were retired. In 2020 alone, 3,000 MW of coal generation was shuttered. In 2021, an additional 7,000 MW of coal plants have gone dark or will do dark by years end. Planned retirements for coal plants from 2022-2025 indicate that over 30,000 MW of generating capacity will be going off-line. From a nuclear generation standpoint, over 3,300 MW of capacity has been removed from the grid since 2019. Another 11,000 MW of nuclear capacity is pending retirement between now and 2025. While renewable energy assets will help fill the void of both coal and nuclear retirements in the coming years, the lion's share of the void will need to be filled by natural gas. With the increases in natural gas demand being seen from both the LNG and pipeline export sectors, adding more electric generation demand into the mix certainly points to natural gas being a commodity that will greatly be needed for years to come.


Natural gas storage helps "balance" the US natural gas market. The highest level of gas in storage ever recorded was back on 11/11/2016 at 4.047 TCF. The US market now considers 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. Current storage levels are at 3.006 TCF with 7 weeks left in the traditional storage injection season. Inventory levels are 16.5% below year-ago levels and 7.1% below the previous 5-year average. In August, storage inventories rose by 144 BCF. This compares to 181 BCF that was injected in August 2020. Assuming "normal" weather conditions for the remainder of the injection season, the working level of gas entering the upcoming heating season is forecasted to by around 3.5 TCF. While this level should be sufficient to meet winter demand in the upcoming 2021/2022 season, concerns about how storage levels will look entering the injection season for 2022 and winter heating season 2022/2023 continue to be on the minds of both analysts and traders.





https://www.marketwatch.com/story/whats-next-for-natural-gas-with-prices-at-their-highest-in-over-7- years-11631810329

https://www.reuters.com/business/energy/trade-group-wants-restrictions-us-natural-gas-exports-2021- 09-17/