Critical Energy News: Monday, February 13

Hey there. Good morning, good afternoon. Thanks for joining another Live Trending Market Update.

We’re taking a quick look at where we’re starting the week with some quick energy prices. I want to start today with what has been our big mover for awhile now – natural gas prices. Specifically, I want to take a look at US gas prices just to open things up. Today is marked by a continuation of factors that have really characterized trading throughout this winter season, the last few weeks, the past few months, and that is mild temperatures. Mild weather throughout this winter season that has a huge impact when we talk about near-term prices and setting up expectations for what kind of price risk we are facing this summer, maybe even into next winter. The scale and consistency we have seen in a mild winter across large parts of the US is having a huge impact in terms of those expectations. That’s why we’re able to say it’s not just short-term; these are long-term effects that we are seeing.

Let’s look at the weather data overall: First, we just look at the near-term weather report. If we look at next 7 to 14-day forecast, the majority of the country is projected to see warmer than normal temperatures. As we sit here in February, we have no part of the country expected to see colder than normal temperatures. No part over the next week. As you get to 8-14 day outlook, you have parts of the western US, but generally, much less populated areas. Of the areas that have really high natural gas and energy demand that are really important for winter – the upper northwest, the Mideast – those are the areas that are seeing the highest probability of mild conditions. That continues to be a huge source of pressure in terms of gas prices, as that means demand expectations are much lower. The natural gas you need for heating is much lower than you would expect this time of year. Having more gas available, that will always translate to lower prices.

Looking at prompt price for Henry Hub, our main US natural gas benchmark price, $2.48/MMBtu. Again, I’ve said it before on these videos, it’s only a little over two months ago that we were seeing over $6/MMBtu. This is a monumental decline in some ways, depending on how you want to measure it. Record decline for this period of time. It is hard to overstate just how much of an impact this mild winter has had.

When you look at the season to date – the next one or two weeks, the winter forecast looks pretty bearish and mild – but if you look at the winter we’ve had so far, season-to-date, almost the entire country – the lower 48 – are seeing warmer than normal termpartures. And you have almost off-the-charts levels of warmer conditions in, again, the northeast, the upper Midwest, and other areas where you would normally see a lot of that gas fired, power demand, or more specifically this time of year, that gas heating demand. That just hasn’t been there. That continues to overshadow, really, any other factors that we’re watching.

The other one, though, if we are keeping our eye on anything else besides the near-term weather, production has been solid as well. There hasn’t been much uncertainty, in terms of comparison to other periods of time. Production looks pretty strong, still kind of inching higher. The growth rate’s not that high, but still inching slightly higher. That’s going to be a source of concern later in the year, when we talk about prices as low as they are now - $2.50/MMBtu. Now prices, when they change, that is not reflected immediately in production on the ground. Unless prices really crash, much more than $2.50/MMBtu, what you see is, the wells that have already been drilled, the gas that has already been drilled, that’s going to continue. What’s going to start to shift, though, is the drilling of new wells. Expanding production, things that take more time and require more capital-intensive development, that, maybe, starts to get put on hold, or you start to have some question marks at the price levels we’re seeing right now. Typically, that will have a lagged impact where, as prices shift lower, somewhere in the order of 6 to 9 months later, you can start to see that reflected in production. So if we continue to see these consistently low prices, eventually that’s going to start to cut into supply, but it’s going to take some time. It’s not going to happen right away. That is something to keep an eye on as we start to look at the summer months or probably, the next winter. As we start to look to 2023/2024, production may not be as strong if these lower prices levels hold.

The other factor on the near-term that maybe is supported, we’re still looking to that Freeport LNG restart. Still taking steps, but still some question marks. When it does return, that’s 2Bcf/day of supply that is going to head out of the US market, likely into the European market. That’s going to take some supply out. The thing that is largely priced in at this point, but still want to see when that is ultimately going to come back online.

Maybe some question marks as we look further down the road that could give you reason to think that gas prices could eventually start to move and trend higher. It’s tough to think of a gas market sustaining prices this low - $2.50/MMbtu – for an extended period of time, because of that production element, but at the same time, I think that’s why we look at a forward curve when it comes to natural gas. We look beyond a prompt contract, contract for March delivery. If we look at, say, a July contract, Henry Hub NYMEX contract for a July delivery, you’re up at $3.10/MMBtu. So it’s not that these $2.50 prices are extending across the forward market indefinitely. We’ve got a pretty steep contango. That’s really exactly what you would expect to see when you have near-term weather really forcing those near-term prices lower, you’d expect to be in a contango market. Which means the earlier you go out, the higher those prices go. $3.10 is still much lower than prices we’ve seen in history; those are still relatively favorable prices compared to what you’ve seen the last couple of years. But we see those contango prices because you have a market that wants to make sure it can keep production around, and prevent those steep production declines that ultimately could end up slingshotting the other way and raising those winter prices as we look to next winter.

Meanwhile on the crude side – crude has lacked a sense of direction in 2023. That is not at all been the case with natural gas, that direction has been clear and toward the downside. But crude has a 1-2 week cycle where it seems to find direction, and then reverses that momentum. The last week or so, it’s been toward the high side. We’ve been inching higher again. WTI pushing back toward that $80/barrel, sitting right now at $79.46/barrel. We are down on the day just a little bit, but not seeing a whole lot of change in terms of days trading. We do have plenty of headlines swirling around with potential impact for crude.

The big one that we had late last week, looking at Russia. They already had these G7 efforts to cap the price of Russian crude. Those efforts are being extended to try to cap the price of Russian refined products – think of diesel, fuel oil, those types of things. Putting price caps on those, as well. There are some complicated mechanisms by which to do that. Russia is certainly trying to get around those price cap efforts. One of the ways they can do that, to a decent extent, is really prioritizing selling into India, China’s market. Shipping can complicate the logistics there, but some ways around that.

That said though, the big announcement was Russia saying they were going to reduce production in March by about 500,000 barrels/day – about 0.5% of global supply. We got a little support initially, seeing global prices about 2% higher as the announcement came out. Didn’t last long, though, the market was content to sell that off, and at this point, it seems to be priced in without a lot of change. That could shift as we see that production actually come off. We have some pretty tight supply balances.

I think the big thing is not so much if we see Russian production go down in March, but if this becomes an ongoing thing. If we see Russia push to continue to drop in production, that could be something that does bring quite a bit of support into this market. It could give it some direction that we really haven’t had so far this year – more of that sideways trading that has characterized prices up to this point. But as we stand today, down just a little bit. Don’t have that direction today.

This week, I would expect to get that mid-week from our storage report. We’ve had some significant storage reports earlier this year, with some big builds, that was maybe challenged last week. We’ll want to see where that goes, if we can start building some new trends coming out of Wednesday’s report.

We’ll check in with all of that, of course, on Friday.

Hope you’ll continue to join us back here every Monday and Friday at 11am EST. Thanks.