Energy Prospectus

A VERY BULLISH REPORT.

Working gas in storage was 3,877 Bcf as of Friday, October 9, 2020, according to EIA estimates. This represents a net increase of 46 Bcf from the previous week. < 5yr ave is 91 BCF.
Stocks were 388 Bcf higher than last year at this time and 353 Bcf above the five-year average of 3,524 Bcf.
At 3,877 Bcf, total working gas is above the five-year historical range.

Build of 45 BCF less than the 5-year average is VERY BULLISH because Hurricane Delta shut-ins can only account for ~10 BCF. This is clear evidence that the ramp up of LNG exports is going to have the major impact on demand we expected. LNG + exports via pipeline to Mexico and Eastern Canada are on-track to exceed 17 BCF per day. That is a 4 BCF per day increase in demand for U.S. natural gas as we head into the winter heating season. There are ~20 weeks in the winter heating season, so 20 X 7 days X 4 BCF = 560 BCF more demand.

There are four more weeks of storage builds expected before winter draws begin. If the builds are equal to the 5-year average (now doubtful), ending storage "pre-winter" will be 4,111 BCF which is high, but still below storage working capacity of ~4,200 BCF. Total storage capacity is ~4,500 BCF, but "working capacity" is considered FULL.

In November, 2018 the natural gas price spiked to $4.70 because winter began with only 3,247 BCF in storage, the lowest level in over five years, but we now have a lot more LNG and pipeline export capacity AND U.S. gas production is on decline and will stay on decline through 1H2021 no matter what gas prices do. If you read the October 6th EIA STEO report you know that EIA now expects U.S. storage to be drained well below the 5-year average by the end of the 2020-2021 heating season. A colder than normal December will set off a bidding war between the utility companies for supply.

TPH Morning Notes 10-15-2020 = More reason to Overweight the Gassers.

US E&P Q3'20 Preview
Oil E&P capital allocation, M&A, and Gas fundamentals most topical across otherwise quiet quarter for upstream

Expecting a relatively quiet quarter as upstream starts to stabilize operations after a dramatic shift lower in drilling and completion activity in Q2. Thematically, a growing portion of the upstream industry is shifting towards an adoption of a business plan that calls for a reinvestment rate of 70-80% of cash flow allocated to the drill bit while capping growth longer term in the mid-single digits.
> Expect gas names to remain extremely topical as investors start to weigh upside in 2022. While we think the 2021 strip fairly reflects fundamentals, we are becoming increasingly bullish in H2’21 and 2022 (TPHe penciling in $3.50/mcf).
> Lastly on key topics, we expect with an improvement in crude prices by 2022 and a normalization of balance sheets that consolidation will accelerate - but timing is always hard to predict. As for mechanics, mark to market for price knocking a few bucks off 2021-2025, with updated strip WTI of $42/bbl in 2021, $43/bbl for 2022, $44/bbl for both 2023 and 2024, and long term 2025+ down to $45/bbl. Gas saw a +21c/mcf change for 2021 to 3.02/mcf, but longer term reversing course with 2025+ down 15c to $2.49/mcf.
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MY TAKE: With so much of the growth in U.S. natural gas production coming from "associated gas" in areas where the primary target is oil - primarily the Permian Basin - I don't see the U.S. natural gas market becoming over-supplied again until oil prices go a lot higher. I think oil price will rise to $70/bbl within 12 months, but not soon enough for a significant increase in Permian Basin D&C that will bring on enough associated gas to push down gas prices before next winter. Raymond James believes that with just normal weather, over the next twelve months we will see a much lower amount of gas in storage heading in the 2021-2022 winter and ngas will move over $4.00/MMBtu.