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About 3 weeks ago, we posted an article about how US natural gas storage is an under invested and undervalued asset because both production and demand for natural gas in the US has grown significantly since 2015, while working gas storage capacity has been unchanged since 2015. In this type of market, the call on natural gas storage increases and both bull and bear time spreads increase in value. Time spreads can be in the form of futures spreads such as the March to April spread (bull spread) or the October to January Spread (bear spread). Time spreads can also be in the form of spot (spot is referred to as cash in physical natural gas trading) to prompt month futures spreads or spot (cash) to any futures month spreads.
Cash (Spot) Prices
On Friday, November 4th, the market saw massive blowouts to the downside in terms of cash to prompt month spreads for the weekend (Saturday, Sunday, and Monday) delivery. Cash prices at just about every physical trading hub in the US traded at massive discounts to the prompt month except for California and the western hubs due to colder than normal weather in the western region of the US.
All locational cash prices for the weekend delivery except for the western locations (Rockies and SoCal) were trading at massive discounts to the Henry Hub December futures. The difference is even larger for Transco Zone 6 NY and TETCO M3 because their December basis futures markets trade at large premiums to the Henry Hub December futures contract.
Storage
Some of the reasons for the sudden plunge in cash prices across the nation (except for the West) are due to very low demand from mild weather, lower weather adjusted demand from weekends, and record high production. The other reason is due to lack of working gas storage capacity. However, Lower 48 US working gas storage is still below the 5-year average.
Working gas storage in the East region of the US is also below the 5-year average.
Working gas storage in the South-Central region of the US is right at the 5-year average.
Summary
Lack of storage space does not look to be the cause for the huge drop in cash prices. However, lack of storage space could still be the cause for the huge drop in prices even though storage is not technically full and is below the 5-year seasonal average. This is because beginning in November, many storage facilities, especially depleted field and aquifer types of storage facilities, stop allowing injections due to the structure and specifics of their storage fields. The beginning of November typically marks the beginning of the winter heating season. Many storage facilities limit injections, and some fields may only allow withdrawals and or limit injections from natural gas storage during this time period. Combine this storage regulated constraint (also known in the industry as a storage ratchet) with the fact that the market is experiencing record high production along with extremely weak demand from the lack of weather and the weekend demand drop off effect, and it creates an environment of stranded gas. It all comes back to the fact that production and demand for natural gas have risen significantly since 2015 while working gas storage capacity has been unchanged. This creates a new volatile regime where natural gas is suddenly stranded, and cash prices crater to near zero or natural gas is suddenly scarce, and cash prices go to the moon and beyond (Winter Storm Uri, Feb-2021).
Hyperion Update
EQT’s frac crews remain at zero.
In their Q3 2022 earnings conference call, EQT stated that they had underperformed on their production guidance and lowered their Q4 2022 production guidance due to the lack of water from the Northeast summer drought and from 3rd party midstream constraints. Hyperion’s near real time tracking of frack crews gave the heads up that their Q3 2022 production would underperform relative to guidance and that they would likely lower their Q4 2022 production guidance. EQT’s fracking crews remain at zero, so it appears that they still haven’t resolved their fracking crew constraints.
Devon Energy
Devon Energy outperformed their production guidance when they reported their Q3 2022 earnings. Devon outperformed their Q3 2022 production by 3% and they increased their Q4 2022 NG production guidance by 2%. Hyperion’s real time tracking of Devon’s frack crews gave the heads up that they would outperform their production guidance before they released earnings. Devon’s frack crews were significantly above their guidance of 5 frack crews during the 3rd quarter.
