Natural Gas Prices Will Remain Low To Force Tighter Balances In Shoulder Season

We are of the view that the market has succeeded in figuring out what natural gas price was needed to shut-in production. And while this helps market participants understand where the bottom is (around $1.50/MMBtu), it doesn’t imply that natural gas prices (NG1:COM) will rebound meaningfully anytime soon.

In our NGF last week, EQT announced that it will reduce production by ~1 Bcf/d in March. But as we cautioned, the market rally on the heels of production cut announcements may be self-defeating.

For now, the price recovery is coming on the heels of announced production cuts, but the reality is that higher natural gas prices will be self-defeating in nature given the bloated storage environment we are in. The moment prices recover, producers will increase production, which would then push prices back down. In essence, low prices are what’s curing low prices, so let the market do its job. Speculators trying to front-run the prospects of low production translating into lower storage may very well be doing the market disfavor.

At today’s price and production level, we have injection season balances close to a ~1.5 Bcf/d deficit.

Lower 48 gas production has averaged between 101 to 102 Bcf/d since the start of March, and this is needed throughout the shoulder season if we are to avoid large injections.

Winter heating demand is coming to an end soon (as you can see in the table below), and looking at our storage forecast table, the first week of April should start the injection season.

Storage Table

Over the next 5 EIA natural gas storage reports, we expect the surplus to the 5-year average to be ~86 Bcf. For the start of April, we have storage exiting winter at 2.282 Tcf, this is 632 Bcf higher than the 5-year average.

Bearish weather is the root cause of the surplus imbalance we see, and the current surplus is estimated to be around +4.67 Bcf/d.

For perspective on storage, the 5-year average for November storage is 3.746 Tcf. To reach this storage level by November, the injection total will have to come in at 1.464 Tcf. This is compared to the 5-year injection total of 2.096 Tcf.

In essence, this injection season would have to be 632 Bcf tighter than normal for us to exit this winter at the 5-year average. With 31 weeks in the injection season, this amounts to an implied deficit of 2.9 Bcf/d.

At -1.5 Bcf/d (our estimate for balance at ~102 Bcf/d production), this would result in storage to finish at 4.053 Tcf.

At ~101 Bcf/d production, the implied deficit would increase to -2.5 Bcf/d or close to the ~2.9 bcf/d needed to push storage back to the 5-year average.

What does the market need to do to force balance?

At today’s production level, it’s unlikely that we see even lower production during the summer months. Power burn demand will spike and with the natural gas futures curve in steep contango, we are unlikely to see producers keep production levels this low.

With summer gas prices above $2.25/MMBtu, we see Lower 48 gas production returning to ~104 Bcf/d. We do expect power burn to surprise to the upside this year with the low prices we are seeing, so in aggregate, we expect the deficit of -1.5 Bcf/d to continue.

The only way for balances to meaningfully surprise during the summer months is if natural gas producers do not bring back production even with those prices. If production increases (like we are expecting), then prices will remain around the futures curve, and readers trading for material upside in natural gas will be disappointed.

In essence, low natural gas prices are what’s needed to force balance and for the sake of the natural gas bulls, the lower the better since the production level will respond to the changes in price.

Storage Balance

Given everything we laid out, it’s very unlikely that we reach the 5-year average by November. Our preliminary estimate shows a storage level of around ~4.05 Tcf, which would be ~300 Bcf higher than the 5-year average.

And with winter natural gas prices averaging well above ~3/MMBtu, we think there’s very little upside (for now) for those betting on a price spike.

Low Prices

In conclusion, low natural gas prices are needed. With storage finishing winter +632 Bcf above the 5-year average, production needs to remain below ~102 Bcf/d. At -1.5 Bcf/d implied deficit this injection season, there’s a pathway back to normality. So not all hope is lost, and the market has forced a production shut-in level from producers.