North America

Published at 08:05 9 Sep 2019 by

High stocks should keep a cap on US natural gas prices through to at least injection season 2020 assuming normal weather. We forecast a storage carryout of over 107 bcm (+16 bcm y/y), or near 3.8 tcf (around +0.57 tcf y/y), at end-October. Given normal winter weather, we expect an end of March 2020 carry-out of near 48 bcm (around +17 bcm y/y), or 1.7 tcf (around +0.6 tcf y/y), which would lead to lower injection demand next summer. We expect growth in US production as new pipeline infrastructure is scheduled for constrained production areas, and that will add bearish pressure this autumn. We see potential for growth in pipeline demand from Mexico, but we think the rise will be capped at 8.5-11.3 mcm/d y/y (0.3-0.4 bcf/d). Our bearish outlook means we forecast Henry Hub cash prices over winter 2019-20 will average 2.50 $/mmbtu with prices for summer 2020 delivery likely to be below both that level and the existing curve.

Our short-term supply-demand balances show high weekly injection rates near 2.5 bcm (90 bcf) for most of September and October. The market could even face five weekly injections in September-October that are above or near 2.8 bcm (100 bcf). As a result, sentiment could turn even more bearish in the coming two months. Our weekly balances also show the potential for injections to last through at least mid-November, which would push storage north of 107 bcm (3.8 tcf). Our balances, which are based on 10-year normal weather beyond the 15-day forecast window, show the first potential weekly withdrawal would be in the week ending 15 November, which we currently forecast will be an injection below 0.37 bcm (in the low teens bcf).

The risks to these figures are ultimately underpinned by the pace of the ramp-up on the Gulf Coast Express (GCX) pipeline, which will take gas from the prolific Permian basin to the US Gulf Coast, and the Sur de Texas-Tuxpan (STT) pipeline, which will facilitate more US gas exports to Mexico. Another important factor will be if the current outsize gains in production that we have seen in August persist. If August flow data are accurate, there has already been a tremendous m/m step-up in sequential production growth of more than 56.7 mcm/d (2.0 bcf/d). The market will need to find a home for new daily record-high production given full service of GCX is scheduled for the latter half of September and two Appalachia processing plants are to potentially enter service in Q4 19. The rise in production could still outweigh potential uplift from US flows to Mexico on STT or from cash prices near $2.00/mmbtu stimulating power demand.

US pipeline exports into Mexico have been capped at 0.15 bcm/d (5.4 bcf/d) since July as the Mexican government-owned utility CFE did not give a green light for the completed STT to start operating, owing to ongoing arbitration proceedings. Following two months of suspension, an agreement brokered by the Mexican president was finally announced on 27 August on the arbitration case between the Mexican government and developers regarding contracts for new pipes. Minor flows have taken place on STT since 4 September. However, there has been no confirmation as to when STT will begin to flow gas into Mexico in any notable volume. CFE’s tender for three cargoes for delivery in September likely indicate October may be when deliveries onto the pipe pick up more meaningfully. We currently assume significant flows will take place in October and we peg flows at 8.5-11.3 mcm/d (0.3-0.4 bcf/d) during STT’s first operational month.

Assuming STT starts up in October, we forecast cross-border flows in the upcoming heating season will grow to 0.17 bcm/d (6.0 bcf/d), a 37 mcm/d (1.3 bcf/d) rise y/y. However, we maintain that maximum capacity on the 74 mcm/d (2.6 bcf/d) STT is likely to be capped at 40 mcm/d (1.4 bcf/d) owing to a lack of downstream connections. The connections that have been confirmed as completed provide 26 mcm/d (0.9 bcf/d) of capacity at Altamira and 14 mcm/d (0.5 bcf/d) at Monte Grande—a total of 40 mcm/d (1.4 bcf/d). Contributing to the lack of downstream connections is the 26 mcm/d (0.9 bcf/d) Tuxpan-Tula, which was initially planned for 2018 but is now set to only be fully online in 2021, according to TC Energia’s Q2 19 earnings call. We think Mexico will need to continue to import LNG, even after STT starts up, given the lack of storage in the country and for pipeline balancing, although import volumes will decline.

LNG cargoes being left in the US pose another risk to our US gas balances. However, October loadings are set to sail as offtakers at Cheniere’s facilities would have had to decide by 20 August not to lift cargoes in October. With the export arb open for Oct-19 and Nov-19, we assume cargoes in those months will go ahead. If no additional maintenance occurs at LNG terminals, feedgas volumes in the sector would be just over 0.18 bcm/d (6.5 bcf/d) in October.

Fig 1: US production forecast, bcm/d Fig 2: Exports to Mexico, bcm/d
Source: EIA, Energy Aspects Source: SENER, EIA

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