U.S. Natural Gas Price Update

Natural gas inventories have rebuilt spectacularly through injection season, despite dropping to 35% below the 5-year average in early March 2019. Current forward pricing suggests the market deems adequate storage will be available come winter unless severe early-season cold sets in, with the winter strip averaging just $2.53/MMBtu at the time of writing . When storage is expressed as months of forward demand cover, inventory levels appear low compared to the previous 5-year range. Due to structural increases in natural demand (primarily power burn and LNG exports), the calculated forward inventory value for October 2019 is 1.20 months of forward demand cover, compared to the 5-year October average of 1.61. We therefore consider winter contracts underpriced, even in 5-year normal weather conditions. Our fundamental balance is however still biased towards the supply side in both 2019 and 2020, as we expect slower growth in the northeast to be offset by a semi-unconstrained Permian as new takeaway capacity is brought online. Turning to the demand side, LNG feedgas demand will overtake power as the main driver of structural demand growth in 2019 and 2020. Consequently, the market will exit 2020 with LNG feedgas demand responsible for 9% of the total demand stack. As we expect global gas markets to remain loose next year, NYMEX prices will need to remain low to keep export arbs open and allow newly unconstrained Permian gas to clear internationally , without overwhelming the domestic market. We therefore expect NYMEX Henry Hub prices to remain subdued over the next year, averaging $2.76/MMBtu in 2019 and $2.60/MMBtu in 2020.