Cycle Trading

[No-Quarter]

NatGas update. I added the bold to the text for emphasis -



http://celsiusenergy.co/p/daily-commentary.html

Natural Gas Surges To 3-Week High On Rebounding LNG Exports & Hot June Temperature Outlook; Will Recovering European Inventories & Falling Margins Price Out US LNG Exports?; Gas Demand To Hold Nearly Steady Today As Hot West Counters Cool Heartland & Mid-Atlantic

6:00 AM EDT, Tuesday, May 24, 2022

Natural gas prices surged on Monday thanks to a hot early-June temperature outlook and rebounding LNG export demand. The June 2022 front-month contract settled up 66 cents or 8.1% to close at $8.74/MMBTU. It was the highest settlement since May 5—and the second highest since August 2008. Prices are now up a massive +203% versus 2021.

Despite the near-term temperature outlook trending somewhat milder for the next 5-7 days, investors were willing to overlook this period of reduced demand due to the increasing prospect of a quick return to hotter-than-normal readings by early June. Meanwhile, investors also cheered the return of near-record LNG export demand. After surging to all-time highs above 13.7 BCF/day in March to help meet strong European demand, LNG exports dipped during April and May due to prolonged seasonal maintenance. As a result, demand averaged close to 12 BCF/day for much of this time frame, up less than 2 BCF/day year-over-year. Over the past five days, however, maintenance work has wrapped at both Cameron and Corpus Christi and volumes have quickly recovered. Fueled also by record output at the new Calcasieu facility and recovering volumes to Sabine Pass, LNG feedgas topped 13 BCF/day last Friday and has held close to 13.2 BCF/day since then until today’s early-cycle, likely temporary pullback to 12.4 BCF/day, as shown in the Figure to the right. Even though European inventories have recovered and prices have retreated, the prospect of further cut-offs by Russia will likely support strong demand the rest of the Summer and Fall. As a result, I would not be surprised to see volumes top 14 BCF/day at some point in the next 6-12 weeks. This could result in a sustained tightening of the supply/demand imbalance. As long as this this imbalance remains tight, there will be continued upward pressure on natural gas and $10/MMBTU remains in play.

What would it take to rebalance supply and demand? First and foremost, production needs to rise to 2022 highs above 97 BCF/day in the next 6 weeks or so. While output has gained around 1.5 BCF/day over the past two weeks to 95.5 BCF/day or so, this has represented a ceiling for the past several months that output has been unable to break through. It remains to be seen whether higher prices and increased drilling activity will finally lead to higher observed output but, based on the latest data, I’m not holding my breath. Similarly, higher prices have not yet affected powerburn which has gotten off to an exceptionally strong start. Even after yesterday’s rare year-over-year decline due to much cooler temperatures, powerburn is still averaging 3.9 BCF/day higher year-over-year over the past week. Of the component fuels of the powerstack, natural gas has, by far, gained the most market share over the past year, up 2.9% versus 2021. On the other hand, despite its consistent presence in the headlines since Russia invaded Ukraine, LNG exports could potentially be at risk later this Summer due to the dramatic improvement of the European storage situation over the past several months. After entering 2022 with a more than -700 BCF deficit versus the 5-year average, this deficit has plummeted to just -109 BCF as of Sunday, as shown in the Figure to the right.

This rapid contraction has been driven by the combination of a mild winter as well as increased imports from the US and global trading partners. Presently, I am projecting that inventories will peak near 3737 BCF in late October, +354 BCF greater than the 5-year average and 99% of capacity, as shown in the Figure to the right. This, of course, is subject to change should the continent see hotter than normal temperatures this Summer or if Russia escalates cutting off its exports to Europe. However, if inventories continue to build apace, European prices will likely come under selling pressure, which could in turn put downside pressure on US prices. Already, the UK benchmark, NBP, has fallen to just $16.97/MMBTU, cutting the LNG profit margin to an estimated $6.25/MMBTU, after accounting for liquefaction & shipping fees. The continental pricepoint, TTF, is considerably higher at $26.08/MMBTU, but this too is subject to aggressive selling pressure should inventories continue to ramp up. In the same way that the European spike in prices was a leading indicator for the eventual spike in US prices so, too, will the impending sell-off prelude lower domestic prices. Stay tuned by checking my European Natural Gas Storage Page HERE.

In summary, with a relatively tight imbalance, an uncomfortable storage deficit, and a favorable temperature outlook, upside potential seems to outweigh downside risk in the near term for natural gas. $10/MMBTU remains a possibility. However, these gains will be transient as, eventually, bearish catalysts will naturally loosen the imbalance and drive prices lower. My downside target prior to the end of the cooling season remains $6.50/MMBTU.

Natural gas demand will hold nearly steady today as unseasonably cool conditions across the Central US and Northeast are countered by heat across California and parts of the Deep South. A rainy day across the Mid-Atlantic will keep highs from Richmond, VA to Washington, DC to Philadelphia, PA stuck in the lower-to-mid-60s, 10F-15F cooler-than-normal. Another storm system across the Heartland will similarly keep Oklahoma City, OK, Topeka, KS and Kansas City, MO also stuck in the 60s, also 10F-15F below-average. On the other hand, it will be a scorcher across California with both Fresno and Sacramento reaching the upper 90s, each around 15F above-average. East of the Rockies, highs across the Deep South will be seasonably warm with Nashville, TN seeing the lower 80s, New Orleans, LA in the upper 80s, and Tampa, FL in the lower 90s, each up to 5F above-average.

Overall, today’s forecast mean population-weighed nationwide temperature will warm by +0.4F from Monday to 65.4F, still 2.5F cooler-than-normal. Total Degree Days (TDDs) will hold nearly steady at 7.5 TDDs today, the 17th fewest for May 23 in the last 41 years since 1981. Click HERE for more on today’s temperature and degree day outlook.

Based on this forecast and early-cycle pipeline data, I am projecting a +11 BCF/day daily natural gas storage injection, around 0.5F smaller than yesterday’s build and 3 BCF bullish versus the 5-year average. By tonight, projected Realtime natural gas inventories will rise to 1857 BCF while the deficit versus the 5-year average will widen to -338 BCF. The year-over-year deficit will also widen by 3 BCF to -399 BCF. Click HERE for more on today’s projected injection and Realtime inventories.