Natural Gas Continues To Get Pummeled As The Weather Outlook Offers No Relief

Natural gas has been on a downtrend ever since the middle of last year. There are three main drivers for this:

• Lower 48 gas production is materially higher y-o-y.

As you can see, with Lower 48 gas production sitting at ~100 Bcf/d, this is an increase of ~5 Bcf/d y-o-y. Most of the increase in 2022 came from associated gas production, with almost all US shale oil regions showing material increase y-o-y. Texas and Western regions are contributing the most at a combined +3.3 Bcf/d, followed by Mid-Con at +1.3 Bcf/d y-o-y. Northeast, interestingly enough, is down y-o-y by 0.6 Bcf/d.

The trend in U.S. shale oil production, in our view, is trending towards higher NGL and natural gas weighting. As more tier 2 and tier 3 wells get drilled, crude oil weighting will drop, which would further exacerbate what we are seeing in natural gas.

By our estimate, Lower 48 gas production will reach ~104 to ~105 Bcf/d by year-end. There will be limited pipeline capacity towards the end of the year for regions like the Permian, which will likely force producers to have to curtail some drilling activities.

• Freeport LNG facility down since June.

The ~2 Bcf/d of needed demand was nonexistent for half a year. By the time restart begins, the Freeport outage would have added ~400 Bcf of gas to storage.

Our current forecast for natural gas storage in April is ~1.7 Tcf, which is ~50 Bcf higher than the 5-year average. Assuming all other variables are equal, this storage would have dropped to ~1.3 Tcf. That would have been the difference-maker between trading at $7 to $9 versus $3 today.

• Weather has not helped one bit.

The weather outlook has been very bearish. According to Commodity Wx Group, this is the warmest January in the last 23 years.

It’s so bearish that for the first week of January, there’s a small possibility we see a build in natural gas storage.

If you look at our current estimate for 1/6 week, we have a draw of 15 Bcf. This would be compared to -155 Bcf for the 5-year average and -179 Bcf last year.

The weather outlook is the main contributor to why we are seeing storage draws being so muted. Over the next 5 weeks, we will see draws underperform the 5-year average by 203 Bcf and 514 Bcf versus last year. That is a significant amount of demand lost to just warmer than normal weather.

What’s worse is that the outlook is not exactly improving for the moment.

Looking at the ECMWF-EPS forecast, heating degree days are going to come in well below the 30-year average.

The 6-10 day period will be the most bearish, with much warmer than normal weather in the Northeast.

The 10-15 day, for the moment, is offering some relief, but it does not look like the pattern will hold. This is not usually a strong confidence signal that there will be sustained cold in the Lower 48.

As a result, the conclusion we reach by looking at the weather forecast is that the outlook continues to remain unsupportive. In order for natural gas to get out of the slump that it’s in, it will need very bullish weather to shake things up. We just don’t have that right now.

Conclusion

Higher production, loss of Freeport LNG, and bearish weather are the main contributors to why natural gas prices continue to get pummeled. In order to reverse the downtrend, we would need to see: 1) Freeport return; and 2) weather models turn bullish.

With natural gas prices where they are, summer power burn demand should get a nice uplift, but that’s still a few months away. Traders are already starting to fixate on what happens by April. If heating demand remains lackluster, then there’s the possibility that storage draws disappoint further, which means prices will have to drop further to factor that in.

That’s just how winter gas trading works. It all comes down to the weather, and for natural gas bulls, the increase in Lower 48 gas production really capped the upside and is exacerbating the current drop.

Until the signals flip, we won’t be participating in any trades.