Natural Gas Market Update - July 1

[dan_s]

Natural Gas & LNG: Henry Hub Headwinds Support a Global Recovery

Devin McDermott – Morgan Stanley
June 30, 2020 2:56 PM GMT

Mounting cancellations of US natural gas exports have driven Henry Hub gas prices to 25-year lows. While negative for domestic demand, this is a necessary supply reduction for global markets - underpinning the beginning of a long recovery for LNG prices. Reiterate OW Cheniere & NFE, cautious bias on gas E&Ps.

Falling supply & rebounding demand support a global LNG recovery, but pressure US Henry Hub. As we highlighted in our recent Global Insight, Approaching the Bottom?, the combination of falling supply from cargo cancellations and recovering demand should begin to put LNG (liquefied natural gas) prices on a recovery path, while also creating near-term downside risk for US Henry Hub. After falling ~65% YTD through the end of May, driving global price parity for the first time in decades, EU gas (TTF) has rallied ~45% and Asia LNG (JKM) ~20% over the past month, while Henry Hub prices have fallen by ~10% - reclaiming the title of the "lowest" among these major global benchmarks. With export arbs still closed and LNG cargo cancellations accelerating, we continue to expect near-term pressure on US Henry Hub (from reduced export demand) and an improving backdrop for other global benchmarks (from reduced LNG supply). We believe the bottom in global LNG prices is likely behind us and continue to see a recovery through year-end.
What's changed in global natural gas? US: Accelerating LNG cargo cancellations and early reversal of some oil curtailments (which increases associated gas supply) have driven Henry Hub prices to 25-year lows and put the US on pace to see end-Oct inventories of 4.2 Tcf, a potential new record. While we continue to have a cautious and range-bound outlook for summer prices, we believe a relatively tight winter 2020-21 balance due to declining supply should still lead to a modest recovery in gas prices into year end. That said, the level of upside is likely limited due to bloated storage.
The path forward will also hinge on oil prices,and sustained >$40 WTI would support a more balanced outlook.