Natural Gas Prices Under Pressure As Production Climbs

1. Restart of Freeport LNG Remains Uncertain

- Despite market rumors suggesting a restart might be delayed again, Freeport LNG is sticking to its original pledge of resuming production in the second half of January.

- Freeport LNG is the US' second largest gas liquefaction facility with three trains and a 15 mtpa capacity. Since its explosion in June 2022 overall exports out of the US dropped by 15%.

- The wider gas market increasingly expects the January restart to be delayed after the US Federal Energy Regulatory Commission did not provide a formal reply to Freeport's assessment report.

- Should Freeport return, feedgas deliveries to liquefaction terminals across the US are expected to increase by some 2 BCf per day, currently trending at 12.3 BCF/d.

2. US Natural Gas Prices Plummet on Overproduction

- US natural gas prices have halved in just under a month, currently trading at $3.7 per mmBtu, as rapidly increasing production is outstripping demand and putting pressure on infrastructure.

- The slump in prices was bolstered by a substantial decline in gas inventories on the back of winter storm Elliott in late December, ending 2022 at 293 bcf, 10% below the 5-year average.

- As the end of winter is set to lower gas demand by March, the rise in gas production will further pressurize prices with Henry Hub futures now in full-blown contango.

- Even after the expected restart of Freeport LNG, structurally lower prices might become a downside risk for further exploration and drilling as revenues would no longer be that profitable.

3. China Nudges Refiners to Run As Hard As Possible

- China is muddling through its opening, easing quarantine requirements and opening borders; however, its main oil-related policy will be that of maximizing product exports.

- Having allocated an oil imports quota 20% larger than last year, the real game changer from Beijing came in the form of a 151-million-barrel product export quota, an almost 50% increase compared to a year ago.

- The Chinese Lunar New Year will most certainly perk up heretofore anemic jet demand in the country as people will finally be free to travel intra-regionally.

- Whilst higher imports and product exports imply China will be buying a lot more crude in the weeks to follow, the impact on prices remains to be seen as those additional barrels might come from Russia or Iran.

4. South Korea Chooses Nuclear over Renewables

- The South Korean government has agreed to bolster its nuclear power generation capacity and downgrade future plans for renewable energy as part of its wider energy policy overhaul.

- Nuclear energy is now expected to account for 33% of generation capacity by 2030, up from the 24% figure that was indicated in previous versions of the Long-Term Electricity Plan.

- Meanwhile, the share of renewables (once assumed to be the main source of electricity) was cut from 30% to just 21%, as President Yoon Suk-yeol intends to end Seoul's anti-nuclear bias.

- With a population that is still almost 75% in favor of nuclear power, South Korea currently operates 24 reactors across four locations.

5. Warm Winter Staves Off Germany's Blackout Risks

- According to the German government, it is increasingly unlikely that Germany will face a physical shortage of natural gas as warm weather has kept consumption well below historical averages.

- With temperatures more than 5° C above the norm, German gas demand was down almost 40% compared to the 5-year average as gas stocks actually rose to 91% of capacity.

- As a consequence, German day-ahead electricity prices dropped to €70 per MWh this week as strong wind power generation helped reduce the burden on fossil generation.

- Last week Germany received its first LNG cargo at the Uniper-operated LNG terminal in Wilhelmshaven, arriving from the US Calcasieu Pass facility.

6. Where Have US Wheat Exports Gone?

- US exports of wheat have nosedived to the lowest reading in over five decades, driven by two disappointing drought-ridden harvests and low international demand.

- The US Department of Agriculture expects wheat exports to come in at 21.1 million tonnes this season, the lowest since 1971-72, cutting the country's global market share to just 10%.

- However, the low-yield harvests of the past two seasons are set to recover in 2022-2023 as the US winter wheat seedings are assessed to hit 35 million acres, a 7-year high.

- Whilst drought is still a potential risk for the winter wheat harvest amidst low crop health, the area covered by drought shrank from the November peak of 75% to 64% currently.

7. Copper Flies High on China Hopes

- Copper soared above $9,000 per metric tonne for the first time in seven months amidst widespread expectations of soon-to-come property-sector stimulus measures in China.

- Low copper inventories held in warehouses have added to the price surge as LME stocks stand at a mere 84,800t lately, an 80% decline since the peak in mid-2018.

- Both Trafigura and Glencore have voiced their concerns about the metals markets being exceptionally tight, with Goldman Sachs predicting copper to reach $11,500 per ton by end-2023.

- In its last report, the International Copper Study Group expected a mild surplus of copper in 2023 after a deficit-plagued 2022, but the resurgence of China's demand might force an overhaul of that assessment.