East Texas gas traders remain skeptical on return of demand at Freeport LNG

East Texas gas traders continued to balk at the prospect of a quick restart of the Freeport LNG export terminal after an eight-month long outage, even as the exporter's return-to-service activities progressed with the approval of US energy regulators to resume ship loading and the Feb. 10 arrival of a tanker at the Texas facility.

The Feb. 9 sign-off from the US Federal Energy Regulatory Commission to resume ship loading marked another step forward for the operator as it prepares to seek authorization to resume commercial operations from one of the 15 million mt/year capacity export terminal's three liquefaction trains, which have been offline since June 8, 2022.

But significant uncertainty remained in the market about the timeline for the return of feedgas demand at Freeport, which can take up to 2.1 Bcf/d when it is operating fully and could help reduce a supply overhang weighing on domestic gas prices. The BP-charted Kmarin Diamond tanker moored at the facility on Feb. 10 was the first vessel to dock at the export terminal since the outage, although a market source said it was being loaded with inventory produced before the shutdown.

Feedgas flows to the Freeport terminal remained small Feb. 10, and the recent commissioning developments did little to offset gas futures traders' reaction to a host of other bearish supply-demand factors, including muted US heating demand this winter, a rising storage surplus and a mild temperature forecast for the balance of February.

"The Freeport LNG facility remains one positive piece of news that could help with a restart potentially occurring in March," RBC Capital Markets analyst Scott Hanold said in a recent note to clients.

As it stands, natural gas prices are "desperately seeking the bottom," said Phil Flynn, senior account executive at Price Futures Group, in a Feb. 10 report.

"Reports that the Freeport LNG terminal is giving permission to resume some ship loading may be a reason for optimism, but a reason for pessimism is weather should be above normal," Flynn said.

Market sources have been expecting Freeport's first export since the outage at the terminal to happen in the second half of February. Freeport, which declined to comment, has reported completing the necessary repair and operational improvements required for restart. But spot US gas prices have responded tepidly to the slight uptick in East Texas gas demand over the past week.

Freeport was scheduled to receive nearly 136 MMcf/d of feedgas on Feb. 10, based on nominations for the morning cycle that could later be revised, S&P Global Commodity Insights data showed. Overall US LNG feedgas demand was about 12.7 Bcf/d.

Over the past several months, the forward market at Houston Ship Channel has priced in steep basis discounts at the East Texas hub for March, April and May 2023, likely reflecting doubts over the resumption of LNG feedgas demand at the Freeport terminal. In late December 2022, prices for all three contracts cratered after the Quintana Island terminal operator acknowledged in a press release that the facility's restart would again be delayed to second-half January.

While the March, April and May forward basis discounts have since narrowed, the three contract prices have all but converged recently to trade around 30 cents behind Henry Hub. The June and July forward basis discounts at Houston Ship Channel, meanwhile, have been hardly affected by the on-again, off-again restart news at Freeport.

Perhaps more telling, is that the July forward basis spread is significantly narrower compared with the earlier contracts – currently trading at just 14 cents behind Henry Hub – likely signaling the market's confidence that feedgas demand at Freeport LNG will have resumed by mid-summer.

Analysts at Mizuho Securities said in a recent note to clients that "Freeport's intentions have largely lost the confidence of the market," with traders instead waiting on FERC authorization for the exporter to resume operations.

For the global LNG market, Freeport's expected near-term resumption of shipments has continued to help drive bearish price sentiment. LNG prices have fallen significantly from 2022 levels but remain high relative to historical norms.

The Platts Gulf Coast Marker for US FOB cargoes loading 30-60 days forward was assessed at $13.385/MMBtu Feb. 10, up 13.5 cents/MMBtu day on day.