Market Newsletter – September 2020September 29, 2020
Written by: Luke Nemes, Director, Energy Procurement & Market Intelligence
Fall has arrived, and for me, that means one thing and one thing only: nuts, everywhere. Around this time every year, thanks to a beneficent 90-ft oak tree that overhangs a corner of my home and provides me with shade in the summer months, and the fauna with a habitat, I am inundated with thousands of acorns afoot, and without fail, their miserly (and on behalf of my lawn, dare I add, devilish) companion, the squirrel. Let’s consider the squirrel: a remarkably complex creature with incredible spatial memory – in fact, an individual squirrel can recall the exact location of up to 10,000 buried nuts (and as many holes in my
lawn), which is a good thing considering most squirrels are classified as scatter hoarders, meaning they bury their nuts in varied locations to avoid major loss at the paws of a hungry competitor. Amazingly, research shows that squirrels can recover up to 95% of their stashes each year, while most of us can hardly remember the WiFi password. This annual harvesting and underground storage mechanism (thanks for bearing with me thus far) are essential for their enduring the harsh winter, but what is even more important to their survival than relocating these buried nuts, is that the nuts fall from the tree in the first place. With no tree, there is no nut, and with no nut, there is nothing to store. Woe is the squirrel with no tree.
Within the natural gas landscape, this “no tree, no nut” premise has reared its head throughout 2020 and continues to materialize in a very palpable way. There has been a lot of discussion lately about record natural gas storage levels heading into the 2020-21 winter. Indeed, we presently have a surplus of “nuts” in storage, largely resultant of a mild winter and robust, record-setting natural production throughout 2018 and 2019. The current data paints a rosy picture to the casual observer: total stockpiles now stand at 3,756 Bcf, up by 14.3% from a year ago and 12.1% above the five-year average for the same week. Furthermore, there is potential for a record high level of stocks (4,000 Bcf +) heading into this winter. Nothing to worry about for the squirrels then, right? That’s a lot of nuts. “Not so fast!” exclaims a bespectacled squirrel digging feverishly, as he looks up momentarily and reminds us of a few other striking data points: 1) this is the twenty-sixth consecutive week where the percentage above last year’s level fell, and 2) after stockpiles reached 79.5% above the same level in 2019 back in March, that 14.3% figure as of last week sounds less impressive, especially considering that the decreases occurred during injection season, when the nuts are supposed to be growing. “Something is certainly awry with the tree,” declares the squirrel. What this additional context highlights is that natural gas production has been declining, is still declining, and will likely continue to decline until at least March of 2021. One look at the Baker Hughes rig counts quickly confirms this – at the end of this September, there were 74 active natural gas rigs; last September, that number was closer to 160. The same attrition appears in the oil rig count data, which, as reminder, were a major part of the boon to natural gas production throughout 2018-2019, with natural gas being a by-product of the production of crude oil. The oil rig count currently sits at 189, down from a whopping
713 at this time last year. With this in mind, we must remember that markets are in the business of anticipating, and the forward curve reflects a seriously bullish sentiment. Despite record levels of natural gas in storage, there are a multitude of predictions (EIA, market analysts, Wall Street) calling for the price of natural gas to average $3.00-$3.50 throughout 2021, largely because it needs to for producers with strained balance sheets to be able to fulfill market needs. The rosy storage portrait is morphing into Van Gogh’s Screaming Man, and yet, there is another element to consider that our squirrel must also prepare for: a thief called LNG (exports), and its implied impact on market balance. Not only is the tree not what it used to be, but there are suddenly more mouths to feed (not to mention the potential for a harsh winter).
The current natural gas market is undersupplied to the tune of around -2 Bcf/d, and that is a figure that is expected to worsen with the incoming decrease in production and higher LNG exports; it will soon be -5 to -5.5 Bcf/d. In addition to some planned maintenance at a major LNG export terminal, there has been a bevy (we ran out of names) of hurricanes and tropical storms making landfall in the Gulf over the past month, resulting in LNG shut-ins. The amount of gas flowing to LNG export plants averaged 5.6 Bcf/d so far in September. That was the most in a month since May, and was up for a second month in a row for
the first time since hitting a record 8.7 Bcf/d in February as rising global gas prices prompted buyers to reverse some cargo cancellations. What this means for storage this winter season (Dec-April) is that there is an additional implied draw of -560 Bcf that would not normally be present. With this in mind, we can expect storage levels by April, even with a warm winter, to fall back in line with the 5-year average at best; at worst, storage levels could rival 2018 (remember $4.50 gas in Nov-2018?). Either way, this would result in an extremely bullish scenario for natural gas considering the market is undersupplied with
increasing exports. Sustained $3.00-$3.50 price levels throughout 2021 are not merely a bullish prediction, it is an expectation based in sound reasoning and developments to price-supportive fundamentals. It is worth noting that while not one calendar month within the EIA’s latest STEO showed a projected price of less than $3.00 in 2021 (range of $3.18-$3.56), the 2021 NYMEX futures curve still holds at $3.00, on average. This represents some extended opportunity for end-users with or without commodity supply agreements to use the time remaining in Q4 to procure their natural gas and electricity supply before the 2021 landscape takes hold. With the pronounced volatility we are currently seeing in the market ($0.20-$0.30 daily price swings), also comes pronounced opportunity, opportunity available to those that are nimble and vigilant, like the persevering (albeit pesky) squirrel. While no squirrels were harmed in the production of this commentary, end-users that ignore the impending price increases could be in for a world of hurt after the winter season.