BofA Equity Research Update on U.S. gas market - Jan 25

[dan_s]

Each day one of our Founding Members based in NYC sends me dozens of market research reports. I scan them all, but 90% of them have nothing to do with energy. Below is one from BofA Equity Research that is "on point".

Weather and increased output delay US nat gas comeback
22 January 2021

At the start of the 2020-2021 winter season, US natural gas prices were ready for a major comeback (see US nat gas picks up escape velocity). Dry production had collapsed to under 89 Bcf/d, nearly 7 Bcf/d lower than the November 2019 high. At the same time, LNG demand was set to surge into the winter with over 10 Bcf/d of exports, an increase of 3 Bcf/d year over year. The market finally looked tight and the prompt contract ended October at the 2020 highs of $3.35/MMBtu. However, warmer temperatures and higher-than-expected production levels in the Northeast derailed the winter comeback story and sent prompt prices sharply lower, breaking $2.60 before the Thanksgiving holiday.

Despite the setback, the US market is still undersupplied...

Even then, the storage surplus vs the 5yr average stands at 218 Bcf, roughly unchanged since the end of October when it stood at 201 Bcf. Despite the market’s bearish overtones, the storage withdrawal period from Nov 1st to Jan 8th this winter ranks as the 4th largest withdrawal in the last ten years. While bearish weather has helped mask the undersupply this winter, the structural tightness should carry into this summer. Still, bearish near term fundamentals have removed any stock-out concerns for this winter allowing the market to "kick the can down the road" when it comes to dealing with the structural undersupply. We expect sluggish producer activity and record LNG exports this summer to push October 2021 inventories to uncomfortably low levels. In addition, a number of climate initiatives by the Biden administration could be positive for US natural gas prices.

...requiring higher forward prices this summer to balance

The warm start to the winter and increased production will likely push end of March inventory levels to 1.7 Tcf, 200 Bcf higher than our previous forecast, but still below the 5yr average of 1.8 Tcf. At current forward prices, we project end of October inventory levels at just 3.4 Tcf, well shy of the 3.7 Tcf five year average. As a result of the early winter setback, we revise our Calendar 2021 forecast to $3.10/MMBtu, from $3.30 prior, but remain 40 cents above the forward curve. Prices higher than current forwards look to be needed in order to achieve an acceptable end of October inventory level, 3.75 Tcf under our price scenario. Our $3.10 Henry Hub forecast translates into a reduction in summer power demand of 1 Bcf/d and increases lower 48 summer production by roughly 700 mmcf/d vs levels implied by current forwards. As the tightness continues, we now project a US natural gas average price of $2.90/MMBtu in 2022.
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MY TAKE: As I mentioned in my Jan 24 podcast, weather is the primary driver of U.S. gas prices this time of year. It does appear that a colder weather pattern is setting up for the northern half of the U.S. this week and that February spacing heating demand will be higher than the 5-year average by quite a bit. I also think that exports of U.S. gas will stay high through Q2 because storage levels in Asia and Europe are very low and will need to be refilled. If the pandemic ends this summer, industrial demand for natural gas should rebound quickly. U.S. gas production will not increase until the number of rigs drilling for gas is back to 150.

Send me an email if you want to read the full report: dmsteffens@comcast.net

PS: All of our "gassers" have a high percentage of their ngas hedged, so near-term price movements have very little impact on their revenues. I show their hedges at the bottom of each forecast model.