- September production readings indicate output is at a near stand-still m/m. Ongoing issues relating to corrosion and remediation works on the TETCO system as well as outages at the Nautilus pipeline have dampened Lower 48 flows. Some output in Q4 19 will be locked in at higher prices because of the higher-than-normal hedging activity recorded during the price run-up at the start of the last heating season. We forecast Lower 48 production growth of 6.8 bcf/d y/y for heating season 2019-20 and 4.5 bcf/d y/y for injection season 2020. We expect sequential gains to pare substantially in injection season 2020, but much of that y/y growth is also a function of the baseline of 2019 output.
- Despite the weakness of the Cal-20 strip compared to where it had been trading earlier in the year, the Swap Data Repository (SDR) indicates that hedging activity has picked up substantially in August and September compared to earlier in Q2 19 and Q3 19. Meanwhile, the Q2 19 earnings call season had shown producers were less hedged compared to the year-ago period, but still at a volume-weighted average price significantly above where the Cal-20 strip was trading. Not only is the pace of production hedging picking up, but the previously locked-in volumes from the post-Q2 19 earnings call season pointed to a $2.80/mmbtu hedged price.
- Our reference case suggests US cargoes will get placed globally over the heating season. However, our outlook is for European storage to enter the injection season at a 140 bcf (4 bcm) y/y surplus and at a record high, so there is a risk that not all US cargoes get placed, particularly in Q3 20. Such risk would only get exacerbated if milder-than-normal weather is realised in Europe (and globally) over winter. However, even when the market was on track to fill storage before the traditional end to the injection season this year, the market did a poor job of sending a financial signal to choke back supply as weakness in the prompt did not bleed into the M+2 or M+3 contracts. We have built in just over 100 bcf of LNG maintenance next injection season, which could serve as a catch-all for the volumes at risk of potential shut-in, though depending on how full European storage exits the 2019-20 winter, this number is prone to upside risk.
- We have upwardly revised our forecast for Mexican pipeline exports on the higher-than-anticipated initial flows on Sur de Texas-Tuxpan (STT). The adjustment is worth an incremental 60 bcf call on supply over the course of the heating season. Still, there are a few risks to the forecast and October will prove telling as to how some of these risks might potentially be resolved, mainly how much less sendout will occur at Altamira. The Altamira LNG terminal has been sending out a business-as-usual 0.4 bcf/d of supply into the pipeline grid after three cargoes were delivered this month. As of now, no cargoes have been publicly tendered for October, so we assume most, but not all, of this sendout will be replaced by flows on STT. We continue to assume there will be an average of one cargo a month arriving into Altamira to act as a system balancer.
Storage and price outlook
- Our current end-October storage estimate sits at 3.81tcf. Our preliminary weekly balances show injections extending through the week ending 15 November, so we estimate US storage will peak just above 3.85 tcf. That translates into an end-March inventory near 1.8 tcf, which should effectively cap prices for injection season 2020. Even under a moderate 5% colder-than-normal scenario, we anticipate storage would be near 1.4 tcf after accounting for demand-side impacts to heating in the res-com and industrial sectors, gains in power load and potential freeze-offs. A 5% milder-than-normal scenario would leave the market looking loose for injection season 2020, with storage near 2.1 tcf and significant legwork to be done to avoid a 4.0 tcf end-October 2020 carryout.
- Under normal weather, we forecast prices of $2.32/mmbtu for Cal-20 given that high end-March 2020 carryout translates into an end-October 2020 carryout north of 3.85 tcf.