Near-Record Exports to Mexico Fuel Momentum for West Texas Forward Markets
U.S. natural gas markets failed to sustain much momentum across the forward curve during the June 8-14 trading period, with July prices averaging 2.0 cents lower as widespread heat has yet to materialize, according to NGI’s Forward Look.
With plump production figures still coming out and storage inventories sitting above average levels, similarly small price changes were seen through the balance of summer (July-October), winter 2023-2024 and the rest of the curve, Forward Look data showed.
There were a few exceptions, however. West Texas markets strengthened by double digits at the front of the curve amid near-record pipeline exports to Mexico. Unlike the Lower 48, heat has been building south of the border since May, with natural gas demand for electricity generation soaring close to the all-time peak levels recorded in June 2021.
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Wood Mackenzie said halfway through June, U.S. pipeline exports to Mexico (Mexports) were averaging more than 6.5 Bcf/d, only around 0.14 Bcf/d below the record set two years ago. Representing a 7% month/month spike, Wood Mackenzie analysts said deliveries have been mainly led by South Texas and West Texas exit points. Notably, West Texas Mexports reached an all-time high of 1.8 Bcf/d last month.
“As the summer rolls out, warmer temperatures are driving stronger cooling loads and therefore incremental demand for natural gas in Mexico’s electricity sector,” said Wood Mackenzie analyst Ricardo Falcon Bautista. “Amid the ongoing heatwaves, this week is setting back-to-back records in the national grid’s hourly load curve.”
On Wednesday, peak demand reached 49.8 GW at 6 p.m. CT, the highest level ever seen in the Mexican wholesale power market, according to Wood Mackenzie.
The consultancy said gas prices at key U.S. locations to the Mexican market – Henry Hub, Houston Ship Channel and Waha – are much cheaper than they were last summer. Aided by recent infrastructure upgrades, major assets such as the Manzanillo LNG facility on Mexico’s West Coast appear to be building on this trend, according to the firm.
“Since April, the power-generating complex has been burning over 0.34 Bcf/d per month,” Falcon Bautista said. “Similar or higher averages were last seen in 2019 when Manzanillo was fully fed by the homonymous regasification terminal – today, its main supplier is Wahalajara.”
Given the stronger pull on natural gas, and likelihood of continued heat into the core summer months – West Texas forward prices rose across the board.
Waha June forward fixed prices jumped 12.0 cents from June 8-14 to reach $1.784, Forward Look data showed. The balance of summer picked up 10.0 cents on average to hit $1.800, while the winter 2023-2024 added only 4.0 cents to reach $2.920.
Transwestern June forward prices moved up 12.0 cents to $1.746, while the balance of summer tacked on 10.0 cents to average $1.760. The winter 2023-2024 strip climbed 4.0 cents on average to $2.883.
El Paso Permian traded similarly, though both Henry Hub and Houston Ship Channel shifted only a couple of cents in either direction throughout the curve. Prices remained below the $3.00 mark through October at both locations, with November edging up to $3.00 at Henry Hub and remaining at or above that level throughout the rest of the curve. Prices don’t reach $3.00 at the Houston Ship Channel until December and fall back below that threshold by next summer, according to Forward Look.
Waiting On Summer
With only pockets of extreme heat in Texas, the Southwest and parts of California so far during the official natural gas summer, gas demand has been relatively low. LNG demand also has been lagging as U.S. export facilities have undergone maintenance following an intense run of operations since Russia’s invasion of Ukraine.
The result has been a steady rebuilding of storage inventories, which exited the winter already on solid footing and have continued to swell since the onset of spring.
The latest storage data, however, may offer some optimism for bulls looking for support.
The Energy Information Administration (EIA) said stocks for the week ending June 9 rose by 84 Bcf, a figure that fell well short of estimates ahead of Thursday’s report. NGI modeled a 90 Bcf increase in inventories, while major polls coalesced around a high 90s Bcf injection.
The EIA’s 84 Bcf build compared with a build of 94 Bcf for the same week a year earlier and was on par with the five-year average.
By region, the Midwest and East led with injections of 28 Bcf and 22 Bcf, respectively, according to EIA. The Pacific region posted an increase of 12 Bcf. The South Central also added 12 Bcf, which included a 7 Bcf build in nonsalt facilities and an increase of 5 Bcf in salts. Mountain region stocks increased by 11 Bcf.
Analyst firm Celsius Energy said the South Central injection of 12 Bcf favored bulls, as the build was 9 Bcf shy of the five-year average for the region. This cut the regional surplus to only 171 Bcf. “With sustained heat across this region, this should fall below 150 Bcf by month’s end,” the firm said on Enelyst, an online energy chat.
Enelyst managing director Het Shah credited the lower South Central injection to lower wind generation and the recent decline in production. Though the latter may prove to be temporary amid a slew of maintenance events taking place across the country, the reduced output coincides with the ongoing turnarounds at U.S. liquefied natural gas export facilities.
As such, total working gas in storage rose to 2,634 Bcf, which is 552 Bcf above year-earlier levels and 353 Bcf above the five-year average, according to EIA.
Swinging LNG Demand
“Next week’s number has more surprises,” Shah added. “We have production off this week, low wind, low Canadian imports…but Sabine Pass and now potentially Freeport down.”
NGI data showed feed gas deliveries sinking close to 10 Dth/d on Wednesday before recovering to 10.75 Dth/d on Thursday.
EBW Analytics Group said Sabine Pass, the largest single point of natural gas demand in North America, remained almost 2.5 Bcf/d below recent highs amid a major maintenance outage. At the same time, rising ambient temperatures are negatively correlated with LNG feed gas. This helps to explain a portion of incremental softening at Cameron, Freeport and Calcasieu Pass to three-week lows on Tuesday.
“Although weakness will likely prove temporary, increasing supply is weighing on cash market pricing,” EBW senior analyst Eli Rubin said.
By the end of the month and into July, however, the twin tailwinds of rising heat and rebounding LNG feed gas demand could build support for an extended move higher into mid-summer, according to EBW – particularly if production remains soft.
Rubin said there are several scenarios on the table for the rest of summer. The market is likely to be laser focused on the supply situation, both in terms of production and the storage trajectory. Hurricanes also pose a threat, both to weather-driven electricity demand and to LNG facilities that could temporarily shutter because of storms. At the same time, any notable decline in European demand for spot LNG cargoes poses a risk for U.S. LNG shut-ins, though the risk declines over the next month or so.
“While numerous bearish risks remain in play, the risk/reward for natural gas turns increasingly bullish into mid-summer,” Rubin said.
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