Natural gas futures churned out another price gain on Tuesday, with analysts largely seeing the move higher as technically driven rather than fueled by any significant change in the supply/demand balance. The March Nymex gas futures contract climbed 12.7 cents  on the day to $2.584/MMBtu, while April futures picked up 12.9 cents to $2.664.

At A Glance:

  • Heating demand lingers
  • Production levels hold steady
  • Freeport recovery proves uneven

Spot gas prices strengthened as well, with NGI’s Spot Gas National Avg. up 14.5 cents to $2.660.

Rare as it was in recent weeks, Tuesday’s nearly 13-cent jump at the front of the Nymex curve appeared to be a wake-up call for sleepy bulls who have grown weary of the continued balmy February outlook, strong production levels and healthy underground storage inventories that have led to the steady sell-off along the futures curve. Sure, there’s Freeport LNG’s impending return, but even that added demand may be priced into the market and isn’t likely to pack the same punch today as it would have a couple of months ago.

Instead, grumblings that the supply side may be set to reconsider growth plans for the remainder of the year move to center stage for the gas market, according to Mobius Risk Group.

With gas prices coming off some 60% this winter, whether the front of the curve has sufficiently moved to limit any supply side additions is the question at hand, the Houston firm said.

A look at the Nymex strip shows sub-$3 pricing through most of the summer before a jump in July. What’s more, prices remain above the $3 throughout 2024, likely as a result of new liquefied natural gas capacity scheduled to enter the market during that time.

However, as Mobius noted, the back of the curve is “wandering around with the competing forces of demand-side additions in 2024 countered by increases in producer hedging activity.”

Goldman Sachs also tackled the issue of (over)supply in a recent note to clients. 

The Goldman analyst team, led by Umang Choudhary, said that while the gas market may benefit from some coal-to-gas switching demand at these lower gas price levels, U.S. gas producers may need to limit activity and shift to production declines before accounting for the benefit of added demand from the power generation sector.

Gas producers traditionally have responded to lower implied gas prices with a three-month lag to activity cuts, according to Goldman. This translates into production with a roughly six-month lag. To keep production largely flat across key dry gas basins, Goldman analysts said a reduction in the rig count of around 25-30 is needed to balance the market. They also advised that producers may consider fewer well completions. 

This decline would be driven largely from the Haynesville Shale, where the Goldman analysts said a roughly $3.25 gas price is needed to generate 10% returns. To keep production flat, they suggest a rig count reduction of about 15-20 rigs and completions of around 60 wells/month.

There are risks to the Goldman view, however.

The firm said it assumes a “rational” production response given expectations for public producer discipline with a focus on returns/free cash flow, and tougher borrowing conditions for the private operators. However, the current tight oilfield services market “can limit producers’ ability to be more responsive to today’s prices,” according to Goldman.

In addition, a sufficient drilled and uncompleted well backlog in the Haynesville may pose a risk if strong completions activity continues even as rigs are dropped, the firm said. The Goldman team also sees risk coming from less disciplined behavior among gas producers given that 2024-25 Nymex strip prices are still above $3.50. This, along with addition of hedges, can reduce the size of producer response needed to balance the market, analysts said.

For its part, the Energy Information Administration (EIA) revised lower its Henry Hub price outlook for 2023, modeling an average price of $3.40. This is a decline of 30% versus the agency’s predictions only one month ago.

In the latest Short-Term Energy Outlook, published Tuesday, the EIA estimated that U.S. dry natural gas production would average 100.2 Bcf/d in January, a new record. Production is on track to average 100-101 Bcf/d this year, the agency said.

Cash Up, Good News For West

Spot gas prices also recovered Tuesday, led by the West Coast, where moisture will stream ahead of and along a cold front to drive up gas demand.

The National Weather Service (NWS) said heavy snow was expected in the higher elevations of the Cascades and northern Rocky mountains into Wednesday. By Wednesday night, the cold front should emerge in the Plains and continue to push southeastward.

“Cooler air in the wake of the front will result in max temperatures briefly dropping 5-10 degrees below average,” NWS forecasters said. 

Pressure was forecast to build over the West behind the front, while the next frontal system could approach the coastal Pacific Northwest late Thursday or early Friday, according to NWS.

As for prices, the SoCal Border Avg. tacked on 40.0 cents day/day to average $4.445 for Wednesday’s gas flow. El Paso S. Mainline/N. Baja cash was up 37.0 cents to $4.475, while in the Rockies, Opal was up 17.0 cents to $3.940.

Even with the largest day/day price increases in the country, the gains on the West Coast are only a fraction of the gargantuan spikes seen earlier in the winter. What’s more, there’s been a major positive development that should further alleviate some of the volatility seen in the region this season.

El Paso Natural Gas Pipeline (EPNG) late Monday received authorization from the Pipeline and Hazardous Materials Safety Administration to fully lift the ongoing pressure restriction on Line 2000. This line had restricted 550,000 MMcf/d of westbound flows since Aug. 15, 2021, following an explosion.

In a notice, EPNG noted that, although pressure has returned, the force majeure remains in effect and is expected to officially conclude on Feb. 15. EPNG, however, has begun its restart plan to return Line 2000 to commercial service.

In addition to bringing increased supply to western markets, and theoretically lower prices, the return of Line 2000 may also bring relief to Waha prices upstream in the Permian Basin. With pipeline capacity tapped out, the increase in throughput could help support prices in the region, especially during periods of low demand like the upcoming spring shoulder season.On Tuesday, Waha cash averaged $1.620, up 32.5 cents on the day, which was generally in line with price increases seen throughout the rest of the country.