The forward curve for the Henry Hub natural gas futures contract is currently in record high contango. A forward curve is in contango when the commodity has higher prices in future delivery months. The April-2024 contract is about $1.11 per MMBtu higher than the April-2023 contract. The April-2025 contract is about 61 cents higher than the April-2024 contract.
A steeply contango forward curve for a commodity means that the supply-demand balance of the commodity is very bearish in the near term but will eventually become bullish in the long term. The price spread differential of a commodity in a steeply contango forward curve can significantly exceed the cost of storage due to limited storage capacity, limited transportation capacity, and limited deliverability of a commodity. The 2-year forward curve for natural gas at the Henry Hub currently exceeds the cost of storage and transportation. This is due to natural gas facing limitations in storage and transportation capacity, which is compounded by the oversupply in the short-term as evidenced by the EIA South Central storage region.
The EIA South Central region includes the states of Alabama, Arkansas, Kansas, Louisiana, Mississippi, Oklahoma, and Texas. Current working gas storage levels in the EIA South Central region are above the historic seasonal 5-year maximum level. The market is very oversupplied and is now pricing in a high probability of production shut-ins in the near term in 2023. As demonstrated by the variable cost production profile for Haynesville and Eagle Ford producers, production shut-ins would result in significantly lower natural gas prices in the short term.
If production shut-ins are needed in the South Central region, it would lead to natural gas prices at the Henry Hub going to below $1.19. This would lead to even steeper contango in the natural gas forward curve if production shut-ins are needed. If production shut-ins do occur, the market will likely bottom at that point as very low prices will fix the over-supply of the natural gas market. Production will likely be stagnant and then the bullish demand factor will come into play in 2024 and beyond. That factor would be the advent of new LNG export projects in the Lower 48 US. EOG Resources is expecting to see 5 Bcf/d of new LNG export projects coming online in the 2024-2025 time period. The spreads between Europe and the US are still attractive for new LNG export terminals in the US as demonstrated by the wide spreads between the US and Europe.
5 Bcf/d of new LNG export demand combined with the fact that production will likely be stagnant in 2024, making the natural gas market bullish in 2024.
Summary
The bearish natural gas supply-demand balance in the near-term, as evidenced by record seasonal high working gas storage levels in the EIA South Central region, is creating a high probability of needed production shut-ins and much lower prices. That combined with a bullish supply-demand balance in 2024-2025, with the advent of 5 Bcf/d of new LNG export demand, is creating a high probability of natural gas shortages in 2024-2025. The short-term bearishness of the natural gas market combined with the long-term bullishness of the natural gas market is creating a contango forward curve that is at record highs and likely to get even higher in the coming months of 2023.
