LNG Worries Trump Bullish Natural Gas Fundamentals

Summary

• We have a storage build of +87 Bcf for the 5/29 week.
• US natural gas fundamental balances continue to improve. Over the next five storage reports, we are estimating an 80 Bcf deficit to the five-year average and -189 Bcf deficit to last year.
• But for US natural gas prices, global LNG prices continue to dictate price movements.
• Even with LNG exports dropping to ~4 Bcf/d, we have the US gas market at a deficit of -2.29 Bcf/d.
• If prices don't improve soon, Lower 48 production will fall to ~83 Bcf/d by year-end, creating a deficit of -10 Bcf/d for 2021.
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Welcome to the fundamentals edition of Natural Gas Daily!

Housekeeping item first.

We have a storage build of +87 Bcf for 5/29 week.

LNG Worries Trump Bullish Natural Gas Fundamentals

US natural gas fundamental balances continue to improve. Over the next five storage reports, we are estimating an 80 Bcf deficit to the five-year average and -189 Bcf deficit to last year. The EOS estimate is still around 3.9 Tcf despite worries over LNG exports in the near term.

Source: HFI Research

But for US natural gas prices, global LNG prices continue to dictate price movements.

Source: CME, HFI Research

Every time Henry Hub has gone above the implied shut-in price, it has sold off rather relentlessly regardless of US gas fundamentals.

This is despite the fact that production loss has totaled ~4 Bcf/d since March, and US gas fundamentals are in the deficit by ~2.29 Bcf/d.

Keep in mind our deficit estimate includes the drop in LNG exports into the 4s.

So, as a result, we don't think it's likely for prices to stay here in the short term. It's very hard to see how the natural gas market can just ignore the incoming supply drop while demand continues to improve.

In addition, given the current pace of well completions and our estimate on US oil production by year end, we see Lower 48 production falling to ~83 Bcf/d or -12 Bcf/d versus exit 2019. So in the event that global LNG market remains in a glut by the spring of 2021, the US gas market would still be in a large deficit of - 4 Bcf/d assuming all LNG exports are lost.

As a result, it's very easy to see a situation where gas prices have to reverse quickly just to incentivize more well completions. The pace of the drop in production will accelerate over the summer.

Analyst’s 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.