Natural gas storage draws were revised lower today following the 1) bearish weather outlook and 2) loosening supply/demand balance. EOS for November remains unchanged at 3.45 Tcf.
Looking at the implied balance for the next 5-weeks, we are headed for a small surplus.
Bearish weather explains most of this surplus, while Lower 48 production remaining well below the highs of ~97 Bcf/d have helped tighten fundamentals.
The inability of gas producers to produce near ~97 Bcf/d has helped tighten natural gas storage balances so far this year. To put this into perspective, Lower 48 gas production has averaged ~93.2 Bcf/d so far this year. Compared to the peak of ~97 Bcf/d, we are off by 3.8 Bcf/d. There are 73 days so far this year, so the total gas supplies lost amount to ~277 Bcf.
This is very meaningful given that US natural gas storage is finishing winter around ~1.4 Tcf. The difference in storage today versus the 5-year average is the difference in the production lost.
Why is this important?
The fact that Lower 48 gas production has yet to recover to the highs is rather meaningful.
For starters, it signals to us that shale producers really back-weighted production into the end of 2021. As a result, the combination of weather and high decline rates have resulted in the production to meaningfully drop-off. Unlike what we saw from 2018 into 2019 where production kept ramping up on a straight line, this time does appear to be different.
As a result, if producers are fighting the escalating decline curve, the production growth going forward may not be as strong as we previously expected. It looks like we won’t reach ~97 Bcf/d until the end of Q2 to the start of Q3 this year. This could, in turn, further tighten the natural gas balance throughout the injection season by ~2 Bcf/d. Theoretically speaking, we could see natural gas storage enter winter season sub-3.2 Tcf, which would create a lot of chaos in the market.
As for natural gas prices, we expect this to keep prices elevated throughout the injection season. The longer it takes for production to recover to the highs, the higher the implied decline rate is for US shale producers. This is going to be the key variable to watch this year.
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