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Natural Gas Outlook for the Coming Months

By Jose García Sanleandro - Mexican Natural Gas Association - AMGN
President

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By José García Sanleandro | President - Wed, 10/19/2022 - 10:00

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Through the end of this year and during the first months of 2023, the natural gas supply in the North American region faces significant challenges due to winter demand, the level of inventories in the US, and high prices given the current international context.

Without a doubt, the international context seems complicated.

First, there are fears of a global economic recession stemming from aggressive monetary policies in the US and elsewhere, which may affect demand.

On the other hand, supply problems generated by the war between Russia and Ukraine are growing, a situation that has directly hit prices in Europe and affects the expectations for prices around the world. In addition, in the face of this situation, the US is now an important supplier for the eurozone.

In the North American region, so far the markets have presented little volatility in terms of prices, but some factors should be closely watched because they could create problems toward the end of the year.

The Energy Information Administration (EIA) reported that inventories in the US were at their lowest level through the end of August, compared to the averages reported for the last five years (2017-2021). In its latest analysis, issued at the beginning of September, the EIA also calculated that the level of US inventories is 12 percent lower than the average of the last five years and forecasts that they will end the year 7 percent below.

Consequently, the Henry Hub reference price continues to trend upward as it has been throughout 2022. In August, it averaged $8.8 per million British Term Units (MMBtu), the highest monthly level seen in the year, compared to $4.38 in January. For the first 20 days of September, it hovered around US$8 and the forecast projects that it will end up slightly above that level.

In the export market, the great demand for hydrocarbons generated worldwide is encouraging the marketers of that country to contribute to a greater supply. US liquefied natural gas exports are forecast at 11.7 billion cubic feet per day (Bcf/d) in the fourth quarter of 2022 and will reach 12.3 Bcf/d in 2023. Although it should be noted that this forecast depends on the planned interruption at the Cove Point export terminal in October not affecting shipments or prices.

Regarding trade between the US and Mexico, for the first months of 2023, the hope is that there will not be any unexpected climatic events. With the experience generated as a result of the sudden energy crisis in Texas in February 2021 after an unexpected snow storm that affected the supply of natural gas to Mexico, due to the suspension of exports and the increase in the price of fuel, the belief is that the authorities of both countries should have put contingency plans for that in advance.

In Mexico, domestic consumption has strengthened as a consequence of the economic reactivation of the industrial sector, whose Gross Domestic Product (GDP) has already recovered to pre-pandemic levels. Not even during the harshest months of the pandemic did purchases of natural gas from abroad stop, which shows that it is the ideal energy source for industry.

For 2022, imports reported throughout May were 5,720 MMcfd and the forecast is that the injection into the system derived from the processing complexes in Mexico will remain around 2,600 MMcfd, the same level it has had since 2018. Therefore, it is necessary to continue this pace to cover a demand of more than 8,000 MMcfd.

It is also worth keeping an eye out in the short term for the evolution of the financial markets and, in particular, the foreign exchange markets. Throughout the year, the volatility of the financial markets due to the armed conflict and the possible global recession has affected the exchange rate of the peso against the dollar, but this effect has been very short term, so we can anticipate that this factor will not increase the price of imported natural gas.

The exchange rate has registered an average of 20 pesos per dollar during September, which is almost at the same level as the period from January to August 2022, according to Bank of Mexico records. As long as the influx of dollars into Mexico is constant through exports, tourist services, and money remittances, there’s no reason to expect a strong slide in the parity of the currencies during the coming months.

In this scenario, the good news is that the natural gas industry in Mexico continues to be strong and is attracting significant investments, mostly for the development of infrastructure that allows the fuel  to be delivered throughout the entire country for the benefit of the population, mainly to the south-southeast, thanks to strategic alliances between the private sector and the government of Mexico.

Photo by:   José Garcia Sanleandro

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