North American natural gas futures prices breached the $6.00/MMBtu high this week as supply concerns and soaring global demand for natural gas combined to tighten the market.
After strong gains on Monday and Tuesday, the May New York Mercantile Exchange futures contract settled at $6.029 on Wednesday, down three tenths of a cent from Tuesday’s close. June was virtually unchanged at $6.107.
This is three straight weeks of strong momentum for US natural gas prices, and analysts see no slowing down. Until there is clear evidence of increased U.S. production growth, “upside limits are somewhat free without Mother Nature stepping in and relieving market players with a short-term interest,” Mobius Risk Group said.
U.S. supply is seen as sluggish, even in the Permian Basin, a key supply point for Mexican natural gas. The Tudor, Pickering, Holt & Co. (TPH) analyst team noted that although the Permian Basin has recently reached highs near 15 billion cubic feet per day, overall supply has been constrained by compared to its expectations for this time of year.
While Lower 48 gas producers stick to capital discipline, European imports of U.S. liquefied natural gas (LNG) have continued at record highs. Mexico, meanwhile, is moving into its months of stronger demand, with April seeing an uptick in U.S. pipeline imports.
“After two months of stagnation, U.S. pipeline imports rebounded in April,” Wood Mackenzie analyst Ricardo Falcón said. NGI Mexico GPI. Wood Mackenzie has pipeline US gas imports from Mexico of about 5.8 billion cubic feet per day so far this month. NGI calculated that on Thursday, Mexico imported 5.79 billion cubic feet from the United States.
“Gas burns for power generation are the primary driver of incremental volumes, signaling the fundamental shift that typically occurs at the start of summer,” Falcón said. He added that Mexican dry gas production remains strong and is at an April year-to-date average of nearly 2.9 Bcf/d.
This “gives way to some gas-to-gas competition on the supply side.” But, “it is not clear to what extent these levels will be maintained during this season,” he added.
Data released on Thursday showed that inflation in Mexico reached 7.45% during the 1st quarter of 2022, the highest level for this period in two decades. Fuel prices led the gains, according to national statistics institute INEGI.
According to an energy sector professional, the lack of permits for private sector companies both to import fuels and for storage has exacerbated price and energy security concerns.
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Mexico’s Supreme Court is expected to rule soon on the legality of amendments to the Electricity Industry Law (LIE) approved in congress last year. Discussions on the subject between the 11 judges began earlier this week.
The LIE is seeking to give the state-owned utility Comisión Federal de Electricidad (CFE) priority over its competitors in the distribution of the country’s electricity. If approved, the LEL would likely impact natural gas demand as more fuel oil would be used in the country’s generation mix, according to market participants.
Mexicans will also head to the polls this weekend to decide whether President Andrés Manuel López Obrador should continue in office. The vote is expected to see a low turnout with “active mobilization of voters by the administration and the ruling Morena party”, according to analysts at Eurasia Group. They said the vote would likely result in “a landslide but inconsequential victory” for the president.
The recall referendum was an idea of the president. López Obardor’s approval rating remains high at around 57%. Meanwhile, “any fear that López Obrador could use the referendum to stay in power after his term ends in 2024 is unfounded. The president has clearly and repeatedly stated that he will not attempt this,” the analysts said.
Spot price in Mexico
In Mexico, NGI natural gas spot prices in the industrial northeast jumped well above $6.00 this week. On Wednesday, Los Ramones rose 32.1 cents to $6,748. Monterrey through the Mier-Monterrey system rose 31.7 cents to $6.523. Tuxpan to Veracruz via Cenagas saw the spot price rise 31.6 cents to $7.281.
In the West, the price of Guadalajara rose 35.2 cents to $7,162. Farther north in El Encino, prices via Tarahumara were $6,431, 39.3 cents higher than the previous day. On the Yucatán Peninsula, the spot price in Mérida was $7.991 on Wednesday, up 31.0 cents.
Mexico’s Sistrangas five-day line pack average was again low this week, hitting 6,381 Bcf on Wednesday (April 6). This is less than the optimal line pack of 6.86 to 7.29 Bcf needed to ensure sufficient pressure in the system. The network operator Cenagas advised users to maintain injections and offtakes at their contractual quantities under pain of penalties.
Demand on Sistrangas on Wednesday was 4.620 Bcf, up from 4.636 Bcf a day earlier. Mexican gas production injected into the system was 1.265 billion cubic feet, up from 1.263 billion cubic feet a week earlier.
Production from the Southeast led the total, with 703MMcf from the region injected into the pipeline network, down 11MMcf from the previous week.
According to calculations by consulting firm Gadex, pipeline imports from the United States into the Sistrangas were 3.330 billion cubic feet on Wednesday, up from 3.387 billion cubic feet a week earlier. LNG imports into the Sistrangas were 10 MMcf.
Gas storage in the United States
On Thursday, the US Energy Information Administration (EIA) reported a withdrawal of 33 billion cubic feet of natural gas for the week ending April. The print exceeded analysts’ expectations.
The South Central region saw a pull of 8,100,000 cu ft, which was evenly split between non-saline and saline facilities. Until Mexico develops storage capacity, this is the most readily available storage system for the country.
For the week ending April 1, total working gas in the south central region was 589 billion cubic feet, compared to 765 billion cubic feet in the same period a year ago. The figure was also 150 billion cubic feet lower than the average of 739 billion cubic feet stored for the same day between 2018 and 2022, the EIA said.