RBC Capital's view of the Natural Gas Market - Aug 24
Posted: Wed Aug 24, 2022 9:34 am
Natural Gas Quick Take: A Touch Above
Natural Gas Strategy
Today US natural gas touched above $10/MMBtu intraday for the first time since 2008 as
Europe/Russia gas flow concerns continued to compound already tight US fundamentals and
low storage in the eyes of investors and market participants. However, before market close,
prices were back in the low $9’s, namely as news of a delay in Freeport LNG’s restart (pushing
partial restart to mid-November) took its toll. Still, gas prices are high, as supply has yet to
grow enough to meet high demand and refill storage, as power burn has been elevated amid
record heat in the US (and elsewhere) at numerous points this summer and few other options
have been available. But how high is justified and for how long?
US natural gas prices have been dominated, like many other asset classes, by macro themes
and geopolitical headlines this year—it is really a macro-driven world out there. In fact, it’s
more of a fear factor phenomenon than just a domestic physical story. We think this is more
fully justified in the case of European natural gas, but when it comes to the US, it has been
perhaps too much so in our view. Yes, fundamentals are tight and storage is still well behind
this time last year and the five-year average (see page 3), but regardless, we struggle to think
of $9–10/MMBtu as the most justified level for US natural gas prices at Henry Hub, especially
when seasons do eventually turn, as beyond Freeport’s restart, the potential for US LNG
exports is a known quantity in the near term.
While prices for many commodities remain elevated, global natural gas especially, the day-to-day
price discovery process has been a bit of an on again, off again bout of news headlines, geopolitics,
fundamental tightness, and generally…a macro-driven market to determine how high prices should
be. While historically a more regionalized market, US natural gas, like many other markets these
days, is extremely macro-driven on top of tight fundamentals. This has meant that anytime news
about Russian pipeline flows into Europe have hit headlines, market concerns have hit US gas prices
as well—perhaps a bit too much, though, in our view. Yes, the US is the world’s swing supplier and
a top global exporter of LNG, but there are limited opportunities for near-term increases given high
utilization of about 96% recently (excluding Freeport LNG’s troubles, but more on that in a bit). The
need for natural gas in Europe is clear, as concerns about Europe’s already stressed and very short
supply picture mount. However, US LNG exports were going to flow near maximum available
capacity anyway, so incrementally more need in Europe does not really translate to incrementally
more absolute volumes leaving the US (more about the destination mix more than anything else),
at least not in the volumes to justify the observed related price volatility in our view.
Anytime when Russia announces pipeline maintenance (most recently a three-day
maintenance period beginning August 31 on Nord Stream 1 before reportedly being set to
come back at 20% of capacity), European gas prices rally as fears that pipeline flows will not
come back at all surge. This is completely justified for European prices, in our view, as we have
consistently warned that Russian gas flows to Europe have a clear geopolitical lens and could
be shut off due to weaponization, sanctions, damage, or a combination thereof as Russia
leverages gas to raise the cost for Europe to support Ukraine. However, while this risk is
justified for European gasforthe aforementioned reasons , we think the moves in US gas prices
are too exaggerated given that operating US LNG export capacity continues to be highly
utilized, around 94% year-to-date (after adjusting for Freeport).
US natural gas prices should be high in this environment, but we struggle to see $9–10/MMBtu
as sustainable. No, production has not grown materially enough to offset the impact of
ongoing export demand and very elevated power burn this summer amid record heatwaves
on low storage (see next page for charts). The relief late today came from news on the export
front. Previously, Freeport LNG had intended to restart its facilities in October, but in a press
release today, that timeline was pushed into November 2022 (85%) and March 2023 (100%).
It stated, “Although typical construction risks could impact the recovery plan, it is anticipated
that initial production can commence in early to mid-November, and ramp up to a sustained
level of at least 2 BCF per day by the end of November, representing over 85% of the export
capacity of the facility. The recovery plan will utilize Freeport LNG’s second LNG loading dock
as a lay berth until loading capabilities at the second dock are reinstated in March 2023, at
which time we anticipate being capable of operating at 100% of our capacity.” Beyond
Freeport, there is little risk of unplanned capacity additions, as any news around the coming
wave of capacity buildout is a mid-decade conversation, not 2022–23. Overall, while this
extends some relief for US gas prices by delaying the restart, fundamentals are still tight in the
US. European gas prices will continue to be at the whim of sentiment and risks around Russian
flows, and seemingly so will US prices (to a certain extent, at least as macro-driven headlines
continue to impact US prices). While we think this is exaggerated and gas prices should be
lower before year-end, it doesn’t mean that the exaggeration cannot linger for some time and
continue to lend upside price risks to even our high scenario US natural gas price outlook.
Natural Gas Strategy
Today US natural gas touched above $10/MMBtu intraday for the first time since 2008 as
Europe/Russia gas flow concerns continued to compound already tight US fundamentals and
low storage in the eyes of investors and market participants. However, before market close,
prices were back in the low $9’s, namely as news of a delay in Freeport LNG’s restart (pushing
partial restart to mid-November) took its toll. Still, gas prices are high, as supply has yet to
grow enough to meet high demand and refill storage, as power burn has been elevated amid
record heat in the US (and elsewhere) at numerous points this summer and few other options
have been available. But how high is justified and for how long?
US natural gas prices have been dominated, like many other asset classes, by macro themes
and geopolitical headlines this year—it is really a macro-driven world out there. In fact, it’s
more of a fear factor phenomenon than just a domestic physical story. We think this is more
fully justified in the case of European natural gas, but when it comes to the US, it has been
perhaps too much so in our view. Yes, fundamentals are tight and storage is still well behind
this time last year and the five-year average (see page 3), but regardless, we struggle to think
of $9–10/MMBtu as the most justified level for US natural gas prices at Henry Hub, especially
when seasons do eventually turn, as beyond Freeport’s restart, the potential for US LNG
exports is a known quantity in the near term.
While prices for many commodities remain elevated, global natural gas especially, the day-to-day
price discovery process has been a bit of an on again, off again bout of news headlines, geopolitics,
fundamental tightness, and generally…a macro-driven market to determine how high prices should
be. While historically a more regionalized market, US natural gas, like many other markets these
days, is extremely macro-driven on top of tight fundamentals. This has meant that anytime news
about Russian pipeline flows into Europe have hit headlines, market concerns have hit US gas prices
as well—perhaps a bit too much, though, in our view. Yes, the US is the world’s swing supplier and
a top global exporter of LNG, but there are limited opportunities for near-term increases given high
utilization of about 96% recently (excluding Freeport LNG’s troubles, but more on that in a bit). The
need for natural gas in Europe is clear, as concerns about Europe’s already stressed and very short
supply picture mount. However, US LNG exports were going to flow near maximum available
capacity anyway, so incrementally more need in Europe does not really translate to incrementally
more absolute volumes leaving the US (more about the destination mix more than anything else),
at least not in the volumes to justify the observed related price volatility in our view.
Anytime when Russia announces pipeline maintenance (most recently a three-day
maintenance period beginning August 31 on Nord Stream 1 before reportedly being set to
come back at 20% of capacity), European gas prices rally as fears that pipeline flows will not
come back at all surge. This is completely justified for European prices, in our view, as we have
consistently warned that Russian gas flows to Europe have a clear geopolitical lens and could
be shut off due to weaponization, sanctions, damage, or a combination thereof as Russia
leverages gas to raise the cost for Europe to support Ukraine. However, while this risk is
justified for European gasforthe aforementioned reasons , we think the moves in US gas prices
are too exaggerated given that operating US LNG export capacity continues to be highly
utilized, around 94% year-to-date (after adjusting for Freeport).
US natural gas prices should be high in this environment, but we struggle to see $9–10/MMBtu
as sustainable. No, production has not grown materially enough to offset the impact of
ongoing export demand and very elevated power burn this summer amid record heatwaves
on low storage (see next page for charts). The relief late today came from news on the export
front. Previously, Freeport LNG had intended to restart its facilities in October, but in a press
release today, that timeline was pushed into November 2022 (85%) and March 2023 (100%).
It stated, “Although typical construction risks could impact the recovery plan, it is anticipated
that initial production can commence in early to mid-November, and ramp up to a sustained
level of at least 2 BCF per day by the end of November, representing over 85% of the export
capacity of the facility. The recovery plan will utilize Freeport LNG’s second LNG loading dock
as a lay berth until loading capabilities at the second dock are reinstated in March 2023, at
which time we anticipate being capable of operating at 100% of our capacity.” Beyond
Freeport, there is little risk of unplanned capacity additions, as any news around the coming
wave of capacity buildout is a mid-decade conversation, not 2022–23. Overall, while this
extends some relief for US gas prices by delaying the restart, fundamentals are still tight in the
US. European gas prices will continue to be at the whim of sentiment and risks around Russian
flows, and seemingly so will US prices (to a certain extent, at least as macro-driven headlines
continue to impact US prices). While we think this is exaggerated and gas prices should be
lower before year-end, it doesn’t mean that the exaggeration cannot linger for some time and
continue to lend upside price risks to even our high scenario US natural gas price outlook.