Natural Gas Price Forecast from RBC - June 29

[dan_s]

Note from RBC Capital Markets 6-29-2022

Commodity markets have experienced strong volatility and natural gas has been no exception to
the fundamental, technical, geopolitical, and weather induced swings recently. Additionally,
natural gas markets were rocked by an explosion at one of the largest US LNG export facilities,
Freeport LNG, which tightened global gas markets at one of the most inopportune times for
Europe, but at the same time, gave relief to still tense US balances (pushing prices down from
nearly $9/MMBtu). That said, despite this slack being added back onto the grid, US natural gas
prices are still in the $6s, a still elevated place in our view. Why? While lower LNG exports mean
more gas is available for demand/storage, production continues to lag, power demand looks
strong this summer, and most importantly, the heightened price sensitivity to storage looks
more durable than we had originally expected. Altogether, this means our high scenario is the
more likely for the remainder of the year regardless.

Recent prices, even in the context of such
a notable hit on US balances, are reflective of a new pricing environment, which we had long
thought was overdone and indicative of a somewhat unsustainable premium. Now however, our
long published high scenario seems the most likely for the remainder of the year given the
enduring heightened sensitivity.

US natural gas began the quarter below $6/MMBtu, before
rallying more than 50% into the $9s, averaging north of $7.50/MMBtu quarter to date. This on its
own points towards our published high scenario ($7.94/MMBtu in Q2) being more likely than we
originally thought versus our middle/original base case. This, coupled with the fact that even
after the aforementioned shut-in of Freeport gas remains in the $6s, indicates to us that the
increased price sensitivity to storage has more legs than we originally hoped, particularly in the
context of likely summer trends.

Consumption of gas in the US power sector has remained high despite high gas prices (our
power demand forecasts are higher in this piece), and we think gas will bear the brunt of
extreme weather outcomes in the power sector this summer as coal-to-gas switching is more
constrained due to historical coal retirements, coal supply constraints, historically low coal
stockpiles, relatively low hydropower output, as well as otherwise exhausted economically
dispatchable power sources.

RBC Capital's Natural Gas Price Forecasts for 2H 2022 and 2023
2022
Q3 = $6.26
Q4 = $6.77
2023
Q1 = $5.97
Q2 = $4.91
Q3 = $4.81
Q4 = $5.45

MY TAKES:
> Weather will be the PRIMARY DRIVER of natural gas prices in the U.S.
> Europe and Asia will remain in a Bidding War for LNG cargos thru at least 2024
> Keep an eye on the Tropics. Gulf of Mexico hurricanes will impact supply & demand.
> If Freeport LNG comes back on-line in Q4 and ngas storage is still 300+ Bcf below the 5-year average it will be bullish for ngas prices.

[dan_s]

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My direct email is dmsteffens@comcast.net