December 29, 2022
U.S. Natural Gas Fundamentals
12/29/22 Weekly Storage Withdrawal Bullish to Market Expectations
Our view: Today's weekly storage inventory data point is macro bullish because the 213 Bcf withdrawal was stronger than the 198 Bcf (withdrawal) consensus median estimate. The withdrawal is well above the 5-year withdrawal average of 106 Bcf and above last year's withdrawal of 125 Bcf for this same week. Natural gas prices continue to plummet as the extreme cold weather passes through the US and is followed by seasonally warm temperatures. The market's focus has returned on 2023 where US gas production is poised to grow 3-4 Bcf/d without any incremental outlet as new LNG capacity additions are a couple of years away. We expect the next weekly storage report at 250 Bcf driven by higher heating demand and reduced production both caused by the freezing weather. This is more than double the 5- year same week average level.
Weekly EIA Storage Recap
The EIA reported a weekly US storage withdrawal of 213 Bcf, bullish to market expectations. The consensus median withdrawal was 198 Bcf (avg withdrawal of 195 Bcf; range of 169 to 215 Bcf). This compares to last year's same-week withdrawal of 125 Bcf and the 5-year average withdrawal of 106 Bcf. Total working storage is now at 3,112 Bcf, 125 Bcf below last year's 3,245 Bcf and 85 Bcf below the 5- year average of 3,197 Bcf.
RBC Outlook
The streak of cold weather is not enough to keep near-term natural gas prices from dropping as the market is fixated on both the warmer weather outlook for early January and an oversupplied domestic gas market in 2023. US storage levels are again below the 5-year average. We expect storage to end the year at around 2.85 Tcf, which is a more favorable situation for gas prices into early 2023 if colder weather emerges again. Our early target for the 2023 storage exiting the withdrawal season is around 1.5 Tcf, lower than historical norms especially when looking at relative days-of-supply.
The Appalachia rig count was flat at 52 rigs this week, but remains up 12 rigs since the start of 2022 and 12 rigs from this time last year. The Haynesville was also flat at 72, and up 23 rigs from YE21 and 24 rigs from this time last year. We do not see material changes for natural gas activity in 2023 at this point.
Associated gas from shale oil is ~28 Bcf/d or 28% of all production and continues to grow. Permian gas infrastructure capacity could cause constraints by late 2023. De-bottlenecking and compression expansions could provide more capacity prior to new major infrastructure additions.
LNG exports have taken on more significance with geopolitics, and demand from both power generation/industrial usage remains strong. LNG export capacity is now over 13 Bcf/d and approved projects should increase that by another 3-4 Bcf/d by YE25.
The 12-month natural gas price strip is $4.27/Mcf, down from last week's $4.77/Mcf. We forecast natural gas prices averaging $4.75/$4.25 in 2023/2024. The strip is averaging $4-5/Mcf through 2026.
Natural Gas Equities
Our top gas-focused ideas are Range Resources (RRC) and EQT Corp (EQT). Investors remain overall positive on natural gas equities on improved pricing and need for global gas (LNG exports). Most U.S. LNG facilities are at or above nameplate capacity with producers generally receiving U.S. based pricing, thus limiting exposure to the robust global pricing. Natural gas equities are +44% YTD, above oilier names that are +36%. Natural gas equities reflect $3.30/Mcf, a 25% discount to the 5-year strip ($4.39/Mcf).