Key takeaways 

 

•         Warm weather and weak industrial demand boosted end of Mar storage levels to 1.78 Tcf, nearly erasing the storage deficit

•         Also, US gas output ramped up to 11 month highs in Mar at 91.4 Bcf/d and now a surge in associated gas volumes looms

•         Thus we drop our HH bal-year forecast to $2.75 on higher storage levels and see Cal 2022 lower at $2.60 on rising output

 

 

March flips the script as gas demand struggles…

 

As US nat gas spot prices set records in February, the prompt contract reached fresh 2021 highs near $3.20/MMBtu. The rally pushed the Cal 2021 Henry Hub average to $3.08/MMBtu, within striking distance of our $3.10/MMBtu forecast. However, the tables quickly turned in March as warm weather reduced demand by nearly 120 Bcf vs normal. The weakness was compounded by the slow return of industrial gas demand along the USGC, as steam crackers and refineries saw extended downtime stemming from the storm. The result was a storage draw of only 52 Bcf in March, well below the 2017-2019 average of nearly 280 Bcf. As a result, March inventories finished at 1.78 Tcf, above the 1.6 Tcf forecast we set at the end of February. The fourth smallest March draw in EIA history erased the storage deficit to the 5 year average, pushing prompt prices below $2.50/MMBtu in early April. 

 

… while US gas production makes 11 month highs…

 

Increased production compounded the effects of warmer weather. US gas production ramped up in March, averaging 91.4 Bcf/d, an 11 month high and an increase of nearly 0.5 Bcf/d from January levels. We now expect production to average 91.1 Bcf/d this year, up 1.1 Bcf/d vs our previous forecast, and 94.6 Bcf/d in 2022, up from 93.8 previously. The higher revisions stem from March production levels exceeding expectations and a faster return of associated gas due to higher crude prices. In particular, production activity has been exceptionally strong in Haynesville, with completion activity levels nearing DPR records. Meanwhile, Northeast producers are doing more with less. Well type curves, after remaining fairly consistent over the last two years, have started to show significant improvement. Finally, Permian activity continues to increase and is getting gassier due to higher Waha gas prices and stronger NGL pricing.

 

… derailing the argument for higher prices this summer

 

Due to increased March inventory levels and higher than expected production, we now see a weaker price environment this summer and move our Henry Hub forecast down. We now expect Henry Hub 2021Q2-Q4, currently trading near $2.90/MMBtu, to average $2.75 and Cal 2022 to average $2.60, roughly 10 cents lower than current forwards. The near 200 Bcf shift higher in March stocks removes the need for almost 1 Bcf/d of gas to coal switching this summer. So end of October storage inventories should still reach 3.7 Tcf at this price deck, in line with the 5yr average. Near term bullish risks include a warmer-than-normal summer boosting gas power demand, and the possibility of stronger-than-expected exports to Mexico. Conversely, LNG exports now exceed 10 Bcf/d and any disruptions, especially due to hurricanes, could materially loosen gas balances. Longer term, the continued rally in WTI crude prices from $47/bbl at the start of the year to over $60/bbl should accelerate associated gas production, while dry gas output is already above expectations, weighing on deferred prices.