Forecasts for 'padded' US inventories highlight bearish pressures on 2023 gas strip

The first weeks of 2023 have prompted a bleaker near-term price outlook for US natural gas, with warmer-than-expected weather, resilient gas production and forecasts for faltering global LNG demand all hinting at an oversupplied market in the first half of the year, S&P Global Commodity Insights analysts said in a webinar Jan. 18.

A warm start to 2023 in a few regions in the US has cut into domestic demand for gas at a time when cold weather usually prompts a surge in heating-linked residential-commercial demand. While S&P Global Commodity Insights analysts previously forecast total US gas demand to rise by 2.2 Bcf/d in the first quarter of 2023 versus the same quarter last year, when demand averaged around 117 Bcf/d, the recent weather patterns could lead forecasts lower.

"We could take that total demand figure of 2.2 Bcf/d and assume it's closer to the 1.9 Bcf/d ballpark assuming that res-comm will be weaker and considering the recent weather forecasts," S&P Global North American gas analyst Felix Clevenger said.

US res-comm demand has averaged just 38.7 Bcf/d in January month to date, a more than 11% decline from the same month in 2022, according to S&P Global data.

Considering recent production strength -- S&P Global data shows US dry gas production has averaged 97.9 Bcf/d in January month to date, up 3% over the same month last year and a potential record high for the month -- market fundamentals are likely to produce "padded" US gas inventories by the end of this winter.

"With anywhere from 2.5-3 Bcf/d of extra supply relative to last year this quarter, we expect balances to become padded by this spring," Clevenger said.

Expectations that most of the US -- except for the storm-plagued West -- will continue to face warm weather and gas oversupply have led leading data forecasters to temper price forecasts in recent days.

The US Energy Information Administration said in its latest Short-Term Energy Outlook issued Jan. 10 that it now expects that cash prices at Henry Hub will average $4.90/MMBtu in 2023, more than $1.50/MMBtu lower than the 2022 average and more than 50 cents lower than the forecast it provided just a month prior in its December STEO. Adding to the downcast mood, US bank Wells Fargo said in a Jan. 4 research note that US gas supply growth will likely "alternate between too much/too little through mid-decade," adding it expects domestic gas prices "to remain under pressure at least until mid-decade."

Traders in US gas futures markets have in recent weeks moved in concert with these sour outlooks: the February Henry Hub contract fell 29 cents in Jan. 18 trading, to $3.31/MMBtu, the lowest price recorded for the contract since August of 2021 and a roughly 25% decline from where the contract opened January, according to data from CME Group.

LNG factor

Swirling dynamics in the global LNG market also indicate that some incremental US gas may be more likely to end up in storage than on a liquefied gas tanker this year.

S&P Global analysts now expect the TTF and JKM indices -- tracking European and Asia-Pacific LNG markets, respectively -- to fall "into the mid-teens" this summer before rising back above $20/MMBtu in the fourth quarter, per S&P Global's Global LNG analyst, Ross Wyeno.

"LNG as the marginal fuel source into Europe has largely tracked lower with weaker European fundamentals," Wyeno said on the webinar. "Weaker demand, higher storages and higher pipeline imports from Russia have led to a situation where not only have we seen JKM prices collapse roughly in line with TTF, but we've also seen that that differential between the JKM and TTF has also tightened up considerably."

S&P Global's latest JKM price forecast, published Jan. 12, projects a $26.77/MMBtu price for ex-ship LNG deliveries into ports in Japan and South Korea in February, marking a roughly 20% decline versus forecasts issued in mid-December; spot markets have shown an even steeper downward curve in recent days, as S&P Global-assessed JKM cargo prices closed Jan. 17 around $18/MMBtu, down nearly 75% from a late-August 2022 peak above $70/MMBtu, according to Wyeno.

Atlantic Basin activity has also recently trended in a bearish direction: US FOB Gulf Coast LNG cargo values dropped to an 11-week low around $14.75/MMBtu on Jan. 17, as supplies continued to outpace demand in the Atlantic.

And as global markets continue to keep an eye on the status of the Freeport LNG terminal -- especially considering news that the facility recently began receiving small amounts of feedgas again -- some market watchers are unconvinced that the terminal and its normal 2 Bcf/d in feedgas demand will reenter the arena anytime soon. US business intelligence provider Rystad Energy said in a Jan. 18 research note that it does not expect Freeport to restart until "March at the earliest."

"Some marginal amounts of feedgas were nominated to the facility this week ... but we have our doubts that this could be signs of life for the plant," Rystad's Emily McClain said in the note. "If the plant outage is extended to mid-year, the market could face an oversupply situation as early as 4Q, with storage inventories well above the 5-year maximum range.

"In this case, we could witness prices falling into the sub-$3.00/MMBtu range, triggering possible shut-ins in predominantly dry gas basins and forcing upstream operators to reevaluate spending and activity plans for 2023."