US natural gas inventories decreased by 98 Bcf for the week ending February 26, compared with the five-year (2016–2020) average net withdrawal of 106 Bcf. Working gas stocks total 1,845 Bcf, which are 178 Bcf lower than the five-year average and 277 Bcf lower than last year at this time. Analysts’ expectations had been for a withdrawal of 142 Bcf. Following the previous weeks’ record cold snap that caused widespread well freeze-offs in the Midcontinent and Texas producing regions, daily dry natural gas production in the Lower 48 states returned to above 90 Bcf/d as of Tuesday, 2/23, signaling a return to “normal” operations for shale producers. However, daily production is still about 5 Bcf/d off the pace from the record high output seen prior to COVID-19 lockdowns. With at least four more storage withdrawals expected this heating season, the market will begin to turn its attention to the summer injection season, which typically runs from the beginning of April to the end of October.
Weekly storage reporting for last year’s injection season saw an average of 66 Bcf per week. This was a significant drop from the previous year’s average of 80 Bcf per week. With current storage levels being 13.1% lower than at the same time last year, combined with lower daily production and increased demand from electricity generation, LNG exports, and pipeline exports into Mexico, all signs seem to point towards upwards price risk on NYMEX futures for not only the balance of 2021 but into 2022, 2023, and possibly 2024. Shale producers continue to signal no increase in output despite higher demand. Their focus remains on pleasing Wall Street and maintaining discipline over drilling spending. Preliminary summer weather outlooks are forecasting “above normal” temperatures for most of the U.S., which could lead to greater demand from the electricity generation sector and could further jeopardize the chances of reaching a “safe” working level of gas in storage by the start of the 2021/2022 heating season. Our previous report noted how the potential for a sub-optimal storage level for the 2021/2022 heating season could have a “domino” effect on future inventory levels and current NYMEX futures prices have not yet factored in this potential scenario. If this scenario does in fact materialize, increased pricing volatility is expected to follow.
In summary, the days of buying NYMEX futures contracts at sub-$3 price levels may be numbered. End users with exposure to natural gas prices for the next few years need to practice diligent and prudent risk management. With exceptional value currently seen in the deferred years, end-users need to be FORWARD thinking to manage their long-term risk exposure to the natural gas market.
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