Opinion: The Real Natgas Over/Under

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(Editor's note: This article was written on Nov. 14 and published in Oil and Gas Investor Dec. 1.)

It’s a biannual big-money game of shorts and longs on whether U.S. gas in storage will be under- or oversupplied entering November and, then, how much will be withdrawn by winter’s exit.

This year, as storage was reloading, analysts and others have been curiously silent about what wasn’t happening. Instead, the emphasis continued on the comfort-inducing percentage difference between current storage and the year-ago level as well as the five-year average.

The EIA’s Nov. 10 report on storage as of Nov. 4—the first Friday of November and traditional end of refill season—showed only a 1% difference in this year’s level (3,580 Bcf) and a year ago (3,617 Bcf). Compared with the five-year average (3,656 Bcf) for October-end, the 2022 level is 2.1% less.

Sending mega tons of LNG to allies in Europe in crisis, U.S. gas producers and exporters answered the call. It’s remarkable—I go so far as to call it “divine,” really, considering the “good versus evil” nature of the situation.

What’s even more incredible is that gas-markets analysis has gone without acknowledgement of this, though: Freeport LNG has been offline since June 8. This is what wasn’t happening.

And there has been no asterisk on that one of the years in the five-year average was the Covid anomaly, 2020, when storage entering November was 3,927 Bcf—nearly the more typical 4 Tcf—as a great deal of global industrial and other demand went dark beginning in February that year.

First in the over/under analysis: Freeport LNG. It was running at capacity, exporting between 1.8 Bcf/d and 2 Bcf/d until a leak resulted in an explosion and a shut-down the morning of June 8. It remained offline as of Nov. 14.

Let’s use 1.8 Bcf/d. If operating, it would have exported 268.2 Bcf in the 149 days of June 8 through Nov. 4. Deducted from the 3,580 Bcf of gas in storage on Nov. 4, the U.S. would have 3,312 Bcf in the ground.

Compared with the year-ago exit of 3,617, the difference would be -9.2%. In comparison with the five-year average of 3,656 Bcf, the difference would be -9.4%.

In short, the record volumes of U.S. gas production this year won’t be enough next year upon Freeport LNG’s return to making daily calls on supply.

Yet the 12-month gas-futures strip on Nov. 14 was $5.20.

Freeport LNG is aiming for a restart before Jan. 1 and describes output as “a sustained level of at least 2 Bcf/d” and that this represents only 85% of export capacity. Last word was that 100% capacity might start in March.

If to go ahead and use 2 Bcf/d in the math (298 Bcf during the 149 days), U.S. gas storage on Nov. 4 would be 9.4% less than the October 2021 exit.

Not being able to exit this October with more gas in storage would point to too little supply.

This is despite that U.S. gas producers haven’t held back. August dry gas output was 99.4 Bcf/d, which was the largest monthly amount ever recorded by the EIA, whose tally began in 1973.

The August level was 4 Bcf/d more than the August 2021 output and represented the 17th consecutive month of growth compared with year-before output.

On the demand side, intra-U.S. consumption was 82.8 Bcf/d in August—5.4% more than in August 2021. Residential demand was 2.8% less (3.3 Bcf/d) than the year before; commercial demand was 0.3% more (4.58 Bcf/d); industrial demand, 0.4% more (21.7 Bcf/d and the second-highest this century); and power-gen, 9.4% more (44.5 Bcf/d and the most ever in August this century).

The rest of consumption was in lease and plant fuel, pipeline and distribution use, and a minor amount as vehicle fuel.

Moving to demand outside the U.S., 17.9 Bcf/d was exported via pipe and LNG tankers.

This and intra-U.S. demand consumed all of U.S. dry gas production in August.

So why was 237 Bcf/d added to storage that month? That 7.65 Bcf/d in the 31 days happens to be what was imported from Canada.

The U.S. didn’t really have a surplus in August. If not for Canadian imports, there wouldn’t have been any add to storage.

The natgas over/under is actually under.