Infrastructure – Several new downstream pipeline meters have started service in South Texas tied to the Permian Highway Pipeline (PHP), suggesting a planned compression expansion may have started service.
Operator Kinder Morgan (KMI) had targeted December 1 as the start-up date for the 0.5 Bcf/d expansion of PHP. East Daley Analytics noticed two new meter points began reporting data on December 1 where PHP ties into Natural Gas Pipeline of America (NGPL) and Tennessee Gas Pipeline (TGP) in Wharton County, TX. Since the start of the month, NGPL has received ~100 MMcf/d at the new meter while flows to TGP have averaged ~120 MMcf/d.
The new flows coincide with KMI’s planned in-service date for the PHP expansion. We do not know if the meters are drawing new Permian Basin production or are a diversion of volumes from other PHP plant receipts. As EDA noted last week, Permian interstate samples hit a new record high in November ’23. However samples on the El Paso system are down ~220 MMcf/d so far in December, primarily from KNTK’s Alpine High and Raptor systems, and could signal a redirection of flows.
In the Permian Basin Supply and Demand Forecast, East Daley forecasts Permian residue gas production to quickly fill the PHP expansion. We model Permian production exits 2023 at 17.4 Bcf/d, a Y-o-Y increase of 2.3 Bcf/d. New natural gas processing and egress pipeline expansions like the PHP project have supported higher supply from the basin, contributing to downward pressure on prices.
East Daley laid out the current market scenario for natural gas in last year’s Dirty Little Secrets, including the decline in gas prices to the $2 price level in 2023 due to a supply overhang. We also highlighted how new Permian infrastructure planned late in 2023 would prolong the supply problems in natural gas. Our new 2024 Dirty Little Secrets will be held on December 13, sign up to join us.
Markets – After several losing sessions, buyers on Tuesday (December 5) finally stepped into the natural gas futures market. The 2023-24 winter strip was priced at $2.82/MMBtu on November 27; one week later, the strip is $0.13 lower at $2.69, and was as much as $0.20 lower on Monday (December 4).
Bearish fundamentals data has dominated the market recently with unseasonably warm weather in the forecas, but the prospect of the winter’s first triple-digit storage withdrawal this week and some slight cooling in the 15-day weather forecast eased the sell-off. But did last week’s sell-off go too far?
In the latest Macro Supply and Demand Forecast, East Daley believes that the Henry Hub spot price will be moderately weaker this winter at an average of $2.83/MMBtu. While we don’t forecast Nymex prices, Henry Hub spot prices and the prompt month often converge towards the end of the settlement period each month.
EDA’s $2.83/MMBtu spot forecast is $0.14 higher than the current winter strip and is based on normal weather demand. We model a storage surplus of 250 Bcf vs the 5-year average by the end of March ‘24.
However, market bears may have gotten ahead of themselves in the back half of the summer 2024 contracts. East Daley forecasts a Henry Hub spot price of $3.32/MMBtu for October ‘24, whereas the market is currently priced at $3.03.
While production growth has been strong recently, falling rig counts and producer guidance indicate that a drop in production could be in store for the first half of 2024. In the latest Macro Supply and Demand Forecast, EDA expects these factors will flip to a storage deficit by September ‘24, putting upward pressure on prices. Market bears were out in full force last week, but may have overstepped.
Storage – Traders expect the Energy Information Administration (EIA) to post a -100 Bcf storage withdrawal for the December 1 week, according to a survey by The Desk. The period featured the largest cold front yet this heating season, bringing below-normal temperatures to most regions of the Lower 48 over the Thanksgiving holidays.
Market estimates range for a withdrawal from -76 Bcf to -131 Bcf. The 5-year average for the last week of November is a -48 Bcf withdrawal, so the storage surplus is likely to shrink considerably with the EIA report.
Lower 48 storage inventory currently totals 3,836 Bcf, 341 Bcf greater than last year and 303 Bcf greater than the 5-year average. In the latest November ’23 Macro Supply and Demand Forecast, East Daley forecasts storage to total 3,774 Bcf at the start of December, or 289 Bcf above the 5-year average.
EDA’s latest Macro Forecast presents an early review of the market balance for Winter 2023-24. We project storage inventory will finish the winter withdrawal season at 1,780 Bcf, about 250 Bcf above the 5-year average of 1,533 Bcf.
Rigs – US rigs increased by 2 W-o-W to bring the total count to 602 for the December 1 week. The Permian is up 3 rigs and the Powder River Basin gained 1 rig.
On the midstream side, DCP Midstream (P66) is up 5 rigs total with additions on its Permian and Eagle Ford systems. MPLX (MPLX) gained 4 rigs on its Anadarko, Bakken, and Marcellus+ Utica systems. Williams (WMB) lost 2 rigs on its Green River system. Western Midstream (WES) lost 2 rigs on its Powder River systems.