CIBC NotesNatural Gas Outlook
A volatile second quarter for natural gas pricing, but likely a sign of things to come.
After reaching a high of US$9.66/MMBtu, NYMEX closed the quarter below US$6/MMBtu.
The Freeport LNG outage was the primary catalyst that drove prices lower, followed by
bearish storage builds. Freeport has recently revised its targeted start date from September
2022 to October 2022; however, we believe any further delays will accelerate a return to a
more balanced natural gas market in the next 12 to 24 months. The recent weather outlook
from NOAA suggests a warmer-than-average summer, which is likely to see power demand
remain strong through the cooling season. The pricing volatility has demonstrated a tight
physical market, and we expect this will continue, given the global pricing dynamics for LNG.
U.S. LNG project build-out is likely to keep a higher floor in long-term natural gas
pricing. During Q2/22, two LNG projects were sanctioned in the U.S with an incremental
capacity of ~3 Bcf/d. We expect more project announcements from U.S. LNG developers in
2022, including but not limited to: Lake Charles, Driftwood, Freeport LNG train 4, Texas LNG,
and the Rio Grande LNG with more than ~10.5 Bcf/d of capacity. As Europe is aiming to
eliminate its energy dependence on Russia, there has been a series of long-term (20+ years
in some cases) offtake agreement announcements related to current and proposed LNG
projects in the U.S. We view the recent developments in the U.S. LNG market as positive
catalysts and supportive for North American natural gas over the long term. The area chart in
Exhibit 6 includes the profile of future U.S. LNG projects, demonstrating the significant
demand pull expected by mid-decade. While we are bullish longer term, we are cautious on
near term pricing through H2/22 and into 2023 without new sources of demand, and
increasing supplies.
North American supply growth is likely to pick up in H2/22 driven by the lower 48. We
expect to see the majority of the growth come from the U.S., in particular the Haynesville and
Permian. While volumes out of the Appalachia basin are expected to remain flat due to the
limited pipeline capacity, the recent increase in the drilling activity in major U.S. basins along
with a growing number of drilled but uncompleted wells in the Haynesville suggest that we should see higher production growth in H2/22. In Canada, volumes are likely to show modest
growth, as operators in NE BC are waiting for a regulatory resolution with the Blueberry River
First Nation, which has thus far driven multiple operators to shift capital spending to Alberta.
While we do expect to see slight growth from some operators in Western Canada, there is
limited excess capacity on pipeline systems to absorb outsized volume growth. In addition,
capital discipline and oilfield service availability is likely to see production growth materialize
as being more modest than past cycles. The line charts in Exhibit 7 show U.S. and Canadian
gas production over the past five years.
Storage will continue to be a stable source of demand with major markets below the
five-year average. Western Canadian inventories are well below their five-year average,
which is a bullish set-up for winter 2022/2023. In the absence of strong production growth out
of the WCSB, we expect the deficit between inventories and the five-year average to persist
unless a sufficient price response incentivizes gas to stay within the basin. In the U.S.,
inventories remain well below the five-year average; however, the pace of injections has
accelerated since the Freeport LNG outage, which should narrow the deficit vs. five-year
average over the coming months. In Europe, while inventories are close to the five-year
average, the risk of permanent shutdown of Nord Stream 1 by Russia has put upward
pressure on the price of European benchmarks. European countries have taken some
serious actions to conserve more natural gas ahead of winter, including reactivating coal-fired
gas plants; however, we believe they are still vulnerable to the risk of a supply cut by Russia.
The line charts in Exhibit 8 show storage levels across Western Canada, Eastern Canada,
the U.S., and Europe.