US natural gas exports: will they balance Henry Hub?

Henry Hub prices are in flux. In early Sept, spot prices traded around $2.50/MMBtu, an increase of nearly 80% over lows seen in late June. More surprisingly, the natural gas benchmark was trading about 13% higher than levels seen in the same prior-year period, despite the COVID-19 pandemic and the worst U.S. quarterly economic performance in modern history. As we discussed in a prior article, elevated prices seemed disconnected with fundamental trends in the market. COVID cases are expected to rise across Europe and North America amid school re-openings and the onset of colder weather, while U.S. natural gas storage levels are high and rising. A recent correction has returned Henry Hub prices to about $2/MMBtu, which we believe better reflects fundamentals.

As we noted previously, it’s possible that markets were betting that associated gas production would fall on lower crude oil production, supporting prices. With rig counts in the Permian stabilizing, we don’t find this view very persuasive, so let’s dive into another demand factor that could support Henry Hub prices: U.S. natural gas exports. With LNG netbacks rising, U.S. LNG exports will grow in the near-term; pipeline exports to Mexico and Canada will also likely rise year-over-year. While exports are expected to support Henry Hub prices, domestic demand accounts for the bulk of natural gas consumption and will determine if prices are overvalued.

Pipeline Exports: Growing and Seasonal

Despite severe economic headwinds, year-to-date (YTD) U.S. pipeline exports of natural gas to Canada and Mexico rose slightly from ~7.5 Bcf/d to ~7.7 Bcf/d. Mexico accounts for an increasingly large share of U.S. pipeline exports, particularly during the summer months, when hotter temperatures require more cooling and natural gas burn.

We expect total pipeline exports will continue to rise through the end of the year, albeit slowly. Mexico is developing its ability to absorb natural gas by expanding its pipeline network to cater to an expanding fleet of gas-fired power plants. On the other hand, the country has likely suffered from COVID even more than its northern neighbor, and Mexican natural gas demand tends to peak in the summer. Exports to Canada will very likely rise in the near-term amid winter temperatures. On balance, we expect pipeline natural gas exports to continue to break records this year, and to potentially grow substantially in the post-COVID environment. For a more detailed assessment of Mexican or Canadian natural gas markets, drop us a line.

LNG Exports: Back in business

We are increasingly optimistic that LNG exports will bounce back as netbacks to Europe and Asia improve and two important LNG facilities return online after hurricane-related outages. LNG netbacks show that cargoes to Asia and, crucially Europe, will likely be “in the money” going forward.

LNG shipments have led to rising to U.S. natural gas exports, with YTD LNG exports standing at 6.7 Bcf/d, up from just 0.5 Bcf/d in 2016.

LNG exports have taken a hit over the summer, of course, with feed gas inflows to U.S. LNG export terminals often falling below 3.0 Bcf/d. The decrease is largely attributable to lower demand in Europe and Northeast Asia, as about 80% of U.S. exports are destined for these two locations. Europe has emerged as the single most important market for U.S. LNG, with its share of all exports rising from just 14% in 2017 to nearly 50% in YTD 2020.

Exports are important, but domestic natural gas demand will be decisive

As we discussed, pipeline and LNG exports have stabilized and will likely grow in the near-term, supporting Henry Hub prices. Exports provide an important outlet for the prolific U.S. shale production, certainly, but domestic demand is the big game in town. With U.S. consumption standing at about 82 Bcf/d, exports account for only 15% of all U.S. natural gas demand. We expect that exports will continue to rise in the near-term, supporting Henry Hub prices, but the surge in the natural gas benchmark’s price perhaps can only be justified by an expectation of high domestic natural gas demand this winter.