Devin McDermott – Morgan Stanley
February 7, 2023 5:01 AM GMT
Henry Hub prices are down 55% over the past two months. Demand is starting to respond, with power sector coal-gas switching rising. As a result, we reduce our end-Oct '23 inventory forecast from 4.2 to 3.92 Tcf. Still, supply growth needs to slow, so prices may need to move lower before recovering.
From extreme highs, back to familiar lows. Strong demand, weak supply, and low inventories helped push Henry Hub to multi-decade highs of nearly ~$10/mmbtu last summer. The setup for 2023 is very different. Over the past few months, rising supply (+2 bcf/d since July and +2.75 y/y in Jan), a mild start to winter (degree days -5% vs normal so far, with Jan the mildest in over a decade), and the delayed restart of Freeport LNG allowed gas storage levels to end January around 2.6 tcf (~7% above normal). Prices have responded accordingly, down ~55% over the past two months and now sit sub-$2.50 - back in the $2-3 range that was prevalent over the 2016-20 period.
Can low prices fix the oversupply? Our cautious view on 2023 natural gas over the past few months has been driven by an outlook for limited new demand amid rising supply, pushing the market from a shortfall to surplus y/y. Late last year, we estimated that gas inventories were on pace to reach 4.2 Tcf by the end of October, 2023 - the highest ever and near max working capacity of all available storage facilities. Prices needed to correct to prevent this storage "tank tops" scenario from happening, by either creating demand or destroying supply. The recent move lower will help on this front, as power sector gas burn has started to rise in recent weeks. Accounting for this, we are lowering our end-Oct '23 inventory forecast from 4.2 Tcf to 3.9. While this is an improvement, its still above normal, and we still see a need for activity cuts to moderate supply growth.
Demand: Over the past month, low prices have started to drive coal-to-gas switching in the power sector. On a weather normalized basis, we estimate fuel switching has been trending ~1 bcf/d. While this is positive for balances, power sector gas demand will face other headwinds in summer 2023 vs 2022: normal weather (-1.3 bcf/d), renewables & nuclear (-1.3 bcf/d), partially offset by coal retirements (+0.5 bcf/d). High west coast snowfall should also improve hydropower output, displacing some gas generation (we estimate -0.5 bcf/d impact). Incorporating the latest coal-gas switching and hydrology trends, we now forecast 2023 power burn of 32.1 bcf/d, up from 31.0 prior. Outside of power, lower gas prices and recovering petchem margins should be a slight tailwind for industrial demand, which we are raising to 23.9 bcf/d (+0.1 bcf/d vs prior). We now estimate 2023 demand of 105.6 bcf/d (up from 105.4) and summer demand of 97.9 bcf/d (Apr-Oct, up from 96.6).
We assume Freeport operates at 50% capacity in March and 100% by April.
Supply: No response to low prices, yet. Gas directed rig counts sit at ~160, roughly flat year-to-date and up ~40% y/y. At current activity levels, we forecast 2.8 bcf/d of y/y supply growth (2.0 bcf/d summer over summer), largely driven by the Haynesville and Permian. Despite improving demand, we still see the need for supply growth to slow — especially in the Haynesville.
Prices likely still need to move lower before recovering, but we may be approaching the bottom. While improving demand from coal-to-gas switching helps moderate oversupply, a producer response is still needed to slow supply growth. After accounting for transport costs and regional price differentials, we estimate ~90% of active Haynesville rigs are operated by producers that need >$2.50 Henry Hub to generate a 10% return, while ~45% have breakevens above $3. That said, much of the growth in the basin is coming from Private operators that may also have protection from hedges. As a result, prices may need to move lower (potentially sub-$2) in the coming months to trigger an adequate supply response.
Natural Gas Price Forecasts - Feb 7
Natural Gas Price Forecasts - Feb 7
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Natural Gas Price Forecasts - Feb 7
Raymond James
Energy Stat: Huge Shift in U.S. Natural Gas Justified & Unfortunately Here to Stay Through 2024
READ MORE: https://raymondjames.bluematrix.com/lin ... 0255c99b12
There are a lot of different ways to try to spin this, but the reality is: we missed where 2023 prices were headed in U.S. natural gas. To say recent weeks have been volatile in the U.S. natural gas markets would be the understatement of the year. The 2023 strip moved down ~20% in between our mid-December 2022 gas market update and our 2023 annual outlook in early January – and then another ~30% lower so far this year. Today’s Energy Stat addresses: 1) why there was a massive change in the outlook for the U.S. natural gas market in the past few months; 2) whether it is justified and where we go next? and 3) what this means for the stocks?
We’ll explain all the changes to our natural gas model throughout the report, but let’s lead with the conclusion – the massive shift in U.S. natural gas prices is justified and Henry Hub prices are likely to stay below $3/MMBtu in 2023 and only get marginally better in 2024.
At this point, it is tough to create a reasonable “base case” scenario that suggests U.S. natural gas prices will be above the strip in either 2023 or 2024, in our view. In some sense, early 2023 weather brought forward our bearish view towards 2024 natural gas prices (though that is of course an over-simplification). While we don’t see a massive change in where storage is tracking for 2023 or 2024 (both around ~4 Tcf), the market has elected to make a much more punitive path for the U.S. natural gas complex. Drastically lower prices, a much lower gas rig count outlook, and slight changes in domestic demand are all required simply achieve the same ~4 Tcf inventory level we had “targeted” in our prior model iteration. Expressed another way, days of forward cover has been harmed on both the numerator and denominator in 2023-24, projecting a moderately tighter relative storage level.
Regardless of how to attribute the change in view, we are now calling for an average Henry Hub price of $2.80/MMBtu in 2023, which is just below the strip. Admittedly, this is a huge forecast revision for us for 2023 – we are essentially cutting our 2023 Henry Hub price forecast in half from where it was a few months ago.
In 2024, our model suggests we need to stay below the strip, now calling for $3.25/MMBtu vs. $4 previously. We were already below the 2024 strip (as of the last time we published in mid-December) at a forecast of $4, but our views are moving lower there as well.
Energy Stat: Huge Shift in U.S. Natural Gas Justified & Unfortunately Here to Stay Through 2024
READ MORE: https://raymondjames.bluematrix.com/lin ... 0255c99b12
There are a lot of different ways to try to spin this, but the reality is: we missed where 2023 prices were headed in U.S. natural gas. To say recent weeks have been volatile in the U.S. natural gas markets would be the understatement of the year. The 2023 strip moved down ~20% in between our mid-December 2022 gas market update and our 2023 annual outlook in early January – and then another ~30% lower so far this year. Today’s Energy Stat addresses: 1) why there was a massive change in the outlook for the U.S. natural gas market in the past few months; 2) whether it is justified and where we go next? and 3) what this means for the stocks?
We’ll explain all the changes to our natural gas model throughout the report, but let’s lead with the conclusion – the massive shift in U.S. natural gas prices is justified and Henry Hub prices are likely to stay below $3/MMBtu in 2023 and only get marginally better in 2024.
At this point, it is tough to create a reasonable “base case” scenario that suggests U.S. natural gas prices will be above the strip in either 2023 or 2024, in our view. In some sense, early 2023 weather brought forward our bearish view towards 2024 natural gas prices (though that is of course an over-simplification). While we don’t see a massive change in where storage is tracking for 2023 or 2024 (both around ~4 Tcf), the market has elected to make a much more punitive path for the U.S. natural gas complex. Drastically lower prices, a much lower gas rig count outlook, and slight changes in domestic demand are all required simply achieve the same ~4 Tcf inventory level we had “targeted” in our prior model iteration. Expressed another way, days of forward cover has been harmed on both the numerator and denominator in 2023-24, projecting a moderately tighter relative storage level.
Regardless of how to attribute the change in view, we are now calling for an average Henry Hub price of $2.80/MMBtu in 2023, which is just below the strip. Admittedly, this is a huge forecast revision for us for 2023 – we are essentially cutting our 2023 Henry Hub price forecast in half from where it was a few months ago.
In 2024, our model suggests we need to stay below the strip, now calling for $3.25/MMBtu vs. $4 previously. We were already below the 2024 strip (as of the last time we published in mid-December) at a forecast of $4, but our views are moving lower there as well.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group