It’s been a volatile summer for U.S. natural gas. The CME NYMEX front month contract spiked from $1.96/MMBtu in late May to $2.99 on July 1, up more than 50% in just over a month. Since then the price has headed mostly south, closing at $2.62/MMBtu on Tuesday, down $.37/MMBtu from its summer high a few weeks ago. As often is the case, the primary culprit has been weather. But for the first time, a new factor is starting to have an impact: LNG exports. During August, approximately 30 Bcf of gas will likely flow into Cheniere Energy’s Sabine Pass for now-routine LNG exports from Train 1 and the initial volumes needed for the start-up of Train 2. The more recent decline in gas prices just happened to follow the announcement that the entire Sabine Pass LNG facility will be shut down for several weeks starting next month for maintenance and to address a design issue. Was LNG a factor in the price decline? Hard to say. We may get a better sense of the market impact of LNG exports when the plant starts back up. At that point even more gas –– up to 1.25-1.5 Bcf/d in total –– could be sucked out of the market, possibly taking a 125-Bcf bite out of supply by the end of this year. The gas market has changed. From here on out, you won’t be able to understand the U.S. natural gas market without a solid grasp of LNG export dynamics. Today, we begin a two-part series on how international demand for U.S.-sourced LNG will have an increasing effect on gas supply, demand and price.
Here in the RBN blogosphere we frequently provide updates of the fundamental factors influencing the natural gas market on — especially the supply/demand balance. The last time was early July in What's Going On?, when we concluded that higher gas demand with only modest growth in production was starting to erode the storage overhang that existed at the start of summer. One thing that stood out in that analysis was LNG exports, which of course were zero in 2015 but were up to 0.5 Bcf/d by mid-June 2016. A couple of weeks ago we zeroed in on the ramp-up in Cheniere’s LNG exports in Way Down Yonder on the Sabine-Ahoochee, and considered the cargoes that had departed Sabine Pass and where the gas came from to supply those cargos. That was just Train 1. Since then, Train 2 began commissioning and total gas delivered to the facility has increased to more than 0.9 Bcf/d, exceeding 1 Bcf multiple days. In the big scheme of things, that is not a huge volume. But when you compare demand last year versus 2016, it is clear that LNG is having an effect on the supply/demand balance. About 25% of the year-on-year change in demand we are seeing in 2016 is LNG, and that number will only get higher as exports increase from Sabine Pass and as other U.S. liquefaction/LNG export facilities now under construction come online.
Please allow us a quick advertorial to explain where we get our numbers. Our analysis here is based on our Natgas Billboard report, our partnership with IAF Advisors in which we do a daily assessment of U.S. natural gas supply, demand and pricing that hits the website and email distribution at about 8 a.m. Central Time each morning. Billboard incorporates a full-blown analysis of pipeline flow data, a weather model, data from the Energy Information Administration (EIA), electricity demand data from Edison Electric Institute (EEI), and IAF’s supply/demand model (which has a 20-year proven track record). Based on all this input, we project the change in natural gas stocks going out five weeks, and a longer-term view of stocks to the end of injection season. Most important, we boil it all down to price – a view of monthly futures contract price settlements at expiration, based upon our latest model inputs. This forecast reflects our interpretation of the fundamentals (the latest data and model runs) and what they imply about price direction. As you might expect, we cannot assert that our price outlook is always correct –– the model inputs are continuously changing. But we can say that our outlook reflects the sum total of what we are seeing in the market at a point in time. That makes it easier to understand how all of the various inputs come together to yield a price direction on any given day.