Welcome to the weather matters edition of Natural Gas Daily!
Natural gas prices dropped over 4% today on the back of ~7 CDD losses and weak power burn demand over the weekend. Over the next four days, we should observe weaker power burn demand due to lower CDDs, but the outlook for 6-15 days appear to show much warmer than normal weather returning.
By the end of June, we see the classic warmer than normal pattern taking shape which should boost power burn demand in high demand regions.
The move in natural gas yesterday turned out not to be the breakout we originally thought.
Prices continue to trend downward but in a narrowing range. We will look to add to our DGAZ short position if natural gas makes a move above the descending triangle.
Fundamentally speaking, the market already has started to absorb the drop in LNG exports, which continues to stagnate around ~4 Bcf/d. Higher power burn over the summer and lower production should continue to keep the builds contained. Rystad Energy recently noted that:
With Henry Hub gas prices well below $3.00/MMBtu, Rystad said that production will wane, and this will eventually work its way into slower injections in storage this summer. “Our new production outlook suggests that injections will slow down substantially after July and that stock levels will be closer to 3,600 Bcf by the end of October (about 400 Bcf below prior forecast),” Rystad said. “The new forecast also shows a faster decline in stock levels during 4Q20, as production continues to decline, and demand increases due to normal seasonality.”Rystad pins this development on the unconventional gas-oriented plays not quite making up for the loss of associated gas from oil-oriented plays. “Assuming that production from conventional and tight oil plays will be driven by liquids totaling close to 31 Bcf/d, an additional 52 Bcf/d is required from unconventional gas plays,” it said. Rystad expects gas-oriented unconventional plays to produce 52-53 Bcf/d of gas if prices are up to about $3.16/MMBtu. Getting higher production would need sharply higher prices, based on most producers’ marginal cost curves.
This is not our forecast as we have 3.935 Tcf for EOS, but we have a similar trajectory for Lower 48 production into year-end.
The downward trend in natural gas production should not change, so the thesis is still broadly intact. And with frac spread count and rig counts remaining at all-time lows, we don’t see a recovery in production until at least H2 2021.
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Disclosure: I am/we are short DGAZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.