U.S. natural gas market / JP Morgan Update - Mar 12

[dan_s]

This was discussed at the beginning of our March 12 webinar. It is VERY IMPORTANT that you understand the impact of what this will do to ngas prices.
--------------------

JP Morgan's View: We have updated our U.S. natural gas demand model to incorporate our latest view of L48 oil and gas supply. We forecast YE21 storage at 2.8 Tcf, which compares to the prior five-year average of 3.2 Tcf. We expect natural gas demand to be flat on a YoY basis, with lower power burn offset by higher industrial and res/com demand. We expect that exports will increase by 21% in 2021, driven by the recovery in LNG demand and the slow grind higher of gas exports to Mexico. On the supply side, we have revised our numbers higher, and we now see total supply up 1% YoY to 95.3 Bcf/d, including over 90 Bcf/d of dry gas production. Our model does support a favorable set-up for 2022 as long as shale discipline holds, largely driven by robust LNG exports.

MY TAKE: In the real or physical world we cannot risk having just 2.8 Tcf in storage at the beginning of the 2021-2022 winter. The utilities will get into a "bidding war" for supply this summer that will push ngas price way over $3.00/MMBtu; maybe has high at $5.00/MMBtu. The last time we got to November with gas storage below the 5-year average was November, 2018 and gas prices spiked to $4.60/MMBtu.

* L48 gas production increases WoW. Lower 48 gas production increased by 230 MMcf/d WoW to 90.7 Bcf/d. This week’s increase was driven by higher output in the Permian (+408 MMcf/d), partially offset by declines in Appalachia (-326 MMcf/d). March MTD production has averaged 90.5 Bcf/d, which is ~5% above the February average of 85.2 Bcf/d (and in-line with the January average of 90.5 Bcf/d), with the largest increases vs February coming from Oklahoma (+1.3 Bcf/d), Non-Permian TX (+1.2 Bcf/d), Permian (+1.2 Bcf/d) and Louisiana (+1.1 Bcf/d).
* Natural gas demand down ~4.8 Bcf/d YoY. U.S. natural gas consumption was down ~4.8 Bcf/d YoY, driven lower by industrial (-3.7 Bcf/d) and power (-3.3 Bcf/d), offset by higher res/com (+2.2 Bcf/d). On a WoW basis, total demand was ~7.6 Bcf/d lower, with lower res/com (-5.0 Bcf/d), power (-1.3 Bcf/d) and industrial (-1.1 Bcf/d).
* LNG feedgas flows up to 10.6 Bcf/d. LNG feedgas flows averaged ~10.6 Bcf/d, up 518 MMcf/d compared to last week’s ~10.1 Bcf/d. Most LNG facilities showed an increase in flows WoW, with the sharpest increases coming from Sabine Pass (+532 MMcf/d) and Cameron (+391 MMcf/d). Corpus Christi (-473 MMcf/d) showed the largest decrease WoW. Freeport reported yesterday that all trains were once again online after one full train went offline last week. Cameron witnessed a decrease in interstate nominations on March 9, which could be due to trains running at a lower efficiency, pigger operation on Columbia Gas, or spring maintenance. As illustrated in Figure 89 to Figure 91, Asian LNG prices were flat on a WoW basis at $6.05 per Mcf, but up 46% from 2020 levels. Meanwhile, European gas prices were up 11% WoW to $6.36 per Mcf and up 97% from 2020 levels.
* Mexican exports up WoW. This week, U.S. gas exports to Mexico were up ~425 MMcf/d to ~6.5 Bcf/d. Mexican exports in March MTD have averaged 6.5 Bcf/d while February averaged 5.7 Bcf/d, below the January average of 6.2 Bcf/d.
* Gas storage ~5% below 5 year average. The EIA reported a 52 Bcf storage withdrawal, which compares to the five-year average withdrawal of 90 Bcf and last year's 48 Bcf withdrawal. Gas storage now sits at 1.8 Tcf, 5% (-104 Bcf) below the five year average and 12% (-250 Bcf) below prior year levels.
* Weekly gas rig count remained flat WoW. The total U.S. gas rig count remained flat WoW at 92 rigs. In gas focused basins, the Appalachia and Haynesville rig count stayed flat at 37 rigs and 46 rigs, respectively.
* Natural gas stocks up WoW. As shown in Figure 4, gas levered equities increased by 8.0% WoW led by RRC (+12.9%), CNX (+12.7%) and AR (+11.0%). Meanwhile, COG (+2.8%) and EQT (+5.4%) performed worse than the peer group average. Over the past month, natural gas names have increased by 16.8%, lagging the XOP Index by ~7.2%. The gassy stocks are up 47.6% on a YTD basis, behind the XOP (+55.7%) and ahead of the XLE (+41.1%). The S&P 500 is up 5.2% YTD.
* Spot Henry Hub gas prices were down WoW. As illustrated in Figure 6, Henry Hub prices were down 3% to $2.58 per MMBtu this week. From a regional basis, the most notable decreases in gas prices were registered Leidy, TETCO and Dominion, with prices at $1.95 per MMBtu (-21%), $2.10 per MMBtu (-20%) and $2.02 per MMBtu (-15%).
* 2021 futures relatively decreased to $2.82 per MMBtu. As illustrated in Figure 66, Henry Hub 2021 futures decreased by 2% to $2.82 per MMBtu while 2022 futures were also relatively flat at $2.66 per MMBtu. From a regional basis, 2021 gas price futures all decreased ~2-3% WoW. Henry Hub 2023 futures were relatively flat at $2.55 per MMBtu.