Freeport ships set sail while Henry Hub prices sink further [GGP]
Freeport LNG is back in the game and ready to ramp up exports again.
The news yesterday that the facility has approval to restart production from one of its liquefaction trains, with a second train coming back online soon, couldn't have come at a worse time for markets as prompt month Henry hub prices sank to multi year lows.
The March Henry Hub futures contract settled at $2.07/MMbtu on Tuesday and dipped below $2/MMbtu in overnight trading.
The April contract, trading at around $2.13/MMbtu is now the prompt month as the March contract expires on Friday.
Market participants can expect more fireworks as the week draws to a close.
Prices have been spiraling all year, and there is little upside potential in sight.
Monthly production averages have yet to rebound to November 2022 levels of 100.8 Bcfd, and as many players accept the likelihood of sustained low prices, operators are hinting at reduced activity through 2023.
Reduced activity and sluggish growth will impact operators with more exposure to price risk i.e., lower volumes hedged in 2023 and flexibility in service contracts.
Based on our research these conditions are heavily skewed towards private operators in the Haynesville and a few public operators in Appalachia.
Meanwhile, domestic consumption has done little to improve balances.
Though power demand has been resilient, weekly withdrawals (-100 Bcf last week) have not met expectations as inventories remain firmly above the five-year average – as the residential and commercial sectors have been tepid on mild weather conditions all winter.
Although latest weather forecasts show colder days on the horizon, particularly in the Pacific and Mountain regions, this is unlikely to cause a material uptick in demand.
So, we should expect moderate demand at best, and a return to warm weather in March.
As supply looks to bounce back and soft demand engulfs the market, the Freeport LNG story has captivated audiences, particularly, in the last few days.
Many market participants see Freeport as the greatest factor influencing upside potential on pricing and could potentially provide a floor at $2/MMbtu.
All vital signs are good from the facility; feedgas deliveries have held steady near 400 MMCfd in recent days, not to mention the flurry of ship activity/movement with 2 additional ships (LNG Rosenrot and Nohshu Maru) loading and departing over the weekend.
We expect more loadings in the coming weeks now that the facility has been granted permission to finally begin LNG production after an eight-month hiatus.
However, 2023 balances will be anything, but linear and market participants can expect volatility to continue.
As is the nature of gas markets, the only certainty is uncertainty, and the scenarios will only expand.
However, we consider some key fundamentals will develop. First of all, our current outlook continues to project incremental supply growth, particularly on the back end of 2023.
We forecast that gas demand will average close to 2022 levels even without the severe heat waves and extended drought season in the Pacific region witnessed last year.
But even with a demand uptick, growth in gas supply may likely present an oversupply scenario as early as 2Q 2023.
Our short-term outlook continues to signal a bearish sentiment, despite the restart of Freeport LNG.
Even with the addition of structural volumes coming online from Freeport LNG as early as March, a price rebound is nothing more than a pipe dream.
Liquefaction capacity limitations and the lack of new export infrastructure projects, sluggish exports to Mexico, and healthy storage inventories after a mild winter are all dampening prices.
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