Flirting with 3.7+ tcf

Published at 16:53 26 Jul 2019 by . Last edited 11:18 22 Aug 2019.

Supply

  • US gas production is still surging despite a considerable slowing in permitting activity in Appalachia and Haynesville. June output outperformed expectations and July would have as well if not for the interruptions to production caused by Hurricane Barry. Gulf Coast Express (GCX) will enter service 7-10 days earlier than its previously expected 1 October start date, raising the baseline of production ahead of the upcoming heating season. We expect a slowdown in growth in gas-directed production contributions, but associated output and near-term NGL fundamentals that point to ongoing ethane rejection are propping up supply too. We see production growth slowing from 8.8 bcf/d y/y in July to over 5 bcf/d y/y this heating season.

Demand

  • European gas storage should be full by the middle of September, according to our balances. As such, global gas fundamentals are still looking bearish. Yet, the arb remains open for US cargoes through the injection season and that margin looks more attractive as winter progresses given the wide contango at the TTF and JKM. We assume no shut-ins at US facilities for several reasons: the arb is open; these cargoes are likely to have already been hedged; and the tanker day rate is a sunk cost for many. Our balances assume maintenance will take offline one generic US train for all of October.
  • Our conservative view on the numerous collective land ownership, permitting and downstream connection issues on Mexican pipes has resulted in essentially no change to our end-October storage on the announcement of arbitration proceedings regarding several Mexican gas pipelines. CFE has only tendered for cargoes into Altamira through 1 August. By our calculations, that supply should last through the second week of August. Given LNG imports are backfilling demand, we continue to view tenders as a sign of the expectation of the timing of Sur de Texas-Tuxpan. Without some limited service on the pipe, CFE will have to go back to tender for more LNG in the coming weeks.

Storage and price outlook

  • Our storage estimate of 3.73 tcf is little changed from our estimate of 3.68 tcf at the start of the injection season. That carryout should help put a lid on prices for the injection season. We forecast Henry Hub cash at $2.25/mmbtu through October. Such a high carryout will also pressure winter contracts, with our reference case calling for prices near $2.55/mmbtu.
  • As the heating season gets underway, demand growth will be robust. LNG feedgas will top 3.5 bcf/d y/y growth in winter 2019-20 assuming the timely start-up of trains at Freeport LNG and at Cameron LNG. Growth in Mexican trade remains dependent on arbitration proceedings and power burn is up near 1.2 bcf/d y/y. However, with supply growth topping 5 bcf/d, our forecast end-March 2020 storage projection is near 1.6 tcf, which should pressure injection season 2020 pricing as well.

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