Natural Gas Forecast 2023 – Will Struggle Without Deep Supply Deficit, Strong European LNG Demand

In the wake of a tumultuous year that saw nearby U.S. natural gas futures breach the elusive $10.00 level in early June and move through the even harder to attain $11.00 level in late August, prices are trading lower than where they were a year ago.

And the bearish tone into the end of the year came on a day where the U.S. Energy information Administration (EIA) reported a stunning 213 Bcf withdrawal from storage for the week-ending December 23.

Huge Demand from Europe Sets Early Bullish Tone

The reason for the early run-up in prices was strong demand from Europe. As the Russia-Ukraine war progressed from February, European nations began to take precautions to avoid a natural gas shortage in the winter of 2022-2023. And U.S. producers were more than willing to sell them LNG at inflated prices. The U.S. producers weren’t gouging the Europeans, but rather stronger demand and record high prices in Europe and Asia set the bar extremely high.

Demand for U.S. LNG was so strong that traders began to price in a supply deficit in the United States for the winter of 2022-2023.

That was until a timely explosion at an LNG plant in Texas stopped the rally.

Freeport LNG Fire Cuts Key Source of US Gas Supply to Europe, Asia

The Freeport LNG plant shut on June 8 after a pipe failure caused an explosion due to inadequate operating and testing procedures, human error and fatigue, according to a report by consultants hired to review the incident and suggest action.

Initially, the outage was supposed to last three-weeks, or just enough for the operator of one of the largest U.S. export plants producing LNG to delay cargoes to Europe, and further stressing the continent’s drive to phase out Russian gas.

The outage at the plant, which provides around 20% of U.S. LNG processing capacity, triggered alarm bells among players in a market already struggling with reduced Russian supplies and resurgent demand in Asia.

Initially, natural gas futures fell on the news, but high summer demand drove prices over $11.00 in late August. After that it was downhill all the way as traders anticipated the outage would free up supplies and help rebuild U.S. storage for winter demand.

US Natural Gas Output to Rise, Demand to Fall in 2023

U.S. natural gas production and demand will rise to record highs in 2022, the U.S. Energy Information Administration (EIA) said in its Short-Term Energy Outlook (STEO) on Tuesday.

EIA projected dry gas production will rise to 98.07 Billion cubic feet per day (bcfd) in 2022 and 99.69 bcfd in 2023 from a record 94.57 bcfd in 2021.

The agency also projected gas consumption would rise from 84.01 bcfd in 2021 to 88.39 bcfd in 2022 before sliding to 85.08 bcfd in 2023. That compares with a record 85.29 bcfd in 2019.

The agency forecast average U.S. liquefied natural gas (LNG) exports would reach 10.85 bcfd in 2022 and 12.33 bcfd in 2023, up from a record 9.76 bcfd in 2021.

EU Could Face Gas Shortage Next Year, IEA Warns

The European Union has enough gas for the winter but could face a shortage next year if Russia cuts supplies further.

Despite slashing gas deliveries in 2022, Europe averted a severe shortage and started the winter with brimming gas storage tanks – thanks in part to emergency EU measures to fill storage, plus a lucky spell of mild weather and high gas prices that dampened demand for the fuel.

But 2023 may pose an even tougher test than the energy crunch that in 2022 hiked fuel bills for European households and forced industries to temporarily close to avoid crippling gas costs.

If Russia was to cut the small share of gas it still delivers to Europe, and Chinese gas demand rebounded from COVID-19 lockdown-induced lows, the EU could face a gas shortfall of 27 billion cubic meters (bcm) in 2023, according to the International Energy Agency (IEA). Total EU gas consumption was 412 bcm in 2021.

“This is a serious challenge,” IEA Executive Director Fatih Birol told a press conference with the European Commission in Brussels in December.

However, the IEA said the shortage could be averted by expanding subsidies and policies to renovate gas-guzzling buildings, replace fossil fuel-based heating with heat pumps and massively expand renewable energy.

2023 Natural Gas Outlook

The new year is expected to start with working gas in storage at 3,112 Bcf. This is 133 Bcf below year-earlier levels and 85 Bcf below the five-year average, according to the EIA. Although the EIA numbers are bullish, forecasts for record warmth the first half of January will keep a lid on prices. However, if the cold weather returns in late January and throughout February then the supply deficit could grow.

Long-term bulls want to see a repeat of last year’s rally, but without the LNG outage. Prices will begin to rise if cold weather widens the deficit, production drops and Russian threatens to cut supply to Europe. This would raise concerns about a shortage during the U.S. summer cooling season.

The Europeans will once again be forced to buy U.S. LNG to refill their storage facilities. Additionally, we expect the Freeport LNG plant to be back online by March. Whenever Freeport returns, U.S. demand for gas will jump. The plant can turn about 2.1 billion cubic feet per day (bcfd) of gas into LNG, which is about 2% of U.S. daily production.

Bearish traders want to see a small winter deficit, record production and Russian gas flowing into Europe. So essentially, they would like the war to end and Russian supply flows return to pre-war levels.

The key to a bullish market in 2023 will be whether the U.S. summer cooling season ends with a big enough deficit to carry over to the start of winter. And the odds of that taking place will increase if Russia cuts supply, the war continues and the U.S. sees record heat this number.