The Final Countdown, Part 2 - RBN's Five-Year Natural Gas Market Outlook

Sunday, 02/12/2023  Published by: Sheetal Nasta  rbnenergy.com

This is an excerpt.  For the full article including graphs, use this link: https://rbnenergy.com/the-final-countdown-part2-rbns-five-year-natu...

The CME/NYMEX Henry Hub prompt futures price has fallen precipitously in recent months and 2023 has the potential to be one of the most bearish in recent history. But longer term, the stage is set for tighter balances, price spikes and increased volatility. After a slowdown in 2022-23, LNG export capacity additions will come fast and furious over the next several years. As they do, they will outpace production growth, which will increasingly depend on pipeline and other midstream expansions. In other words, 2023 will be the last aftershock of Shale Era surpluses. We got a taste of what that could look like in 2022, but just how out-of-whack could the gas market get? In today’s RBN blog, we discuss the supply and demand trends that will shape the gas market over the next five years.

In Part 1, we summarized the various factors that sent gas prices tumbling from 14-year highs nearing $10/MMBtu six months ago to the sub-$3/MMBtu prices seen in recent weeks. It started with the shutdown of the Freeport LNG export facility after a fire last June that took nearly 2 Bcf/d of demand out of the market instantly. On top of that, a mild fall shoulder season dampened demand further even as production hit single-day highs of 100 Bcf/d or more. And the final death knell for bullish prospects in the near-term? One of the most bearish starts to the new year in at least 13 years — possibly ever. An exceptionally warm January crushed demand and domestic consumption dropped to six-year lows for January and lagged by more than 14 Bcf/d year-on-year, while the Freeport outage kept exports flat. At the same time, the warmer weather kept wellhead freeze-offs at bay and dry gas production surpassed 100 Bcf/d on a monthly average basis for the first time in January, averaging 6.2 Bcf/d higher than last year. As a result, the supply-demand balance was the loosest we’ve seen in January going back to at least 2010, and ~20 Bcf/d looser than last year.

These trends compounded what was already a bearish scenario for 2023. That’s because for the first time since 2016, there is little upside to LNG export growth expected this year. Freeport is in the process of restarting operations, but that is the return of existing capacity. And while Venture Global’s Calcasieu Pass will be commercialized this year, it was already taking feedgas for much of last year at a rate consistent with full utilization. Beyond that, there’s no new export capacity due online this year. On the other hand, Lower 48 dry gas production is on track to notch a healthy year-on-year gain. To the extent that storage has to absorb the rest, we are likely to see surpluses swell, which will not only mean lower prices versus 2022 but a return to the kind of rangebound price action we saw pre-COVID.

But as we also mentioned in Part 1, the 2023 downturn is likely to be short-lived, as the next wave of LNG export capacity starts to ramp up in 2024 and accelerate over the coming years (more on the latest project timelines in an upcoming blog). Overall, production will most likely keep up, but as the market tightens, the potential for mismatched timing between LNG exports and production growth will make it touch-and-go in some years. That brings us to our five-year outlook and how balances are likely to shape up by year.