In a world of consensus views and the ever-present pressure to not step too far outside the norm, we at BTU find a particular joy in discussing, and often debating, our analysis that does not fall within the bounds of “safe”. As of late, the most ubiquitous question we get from clients and prospects alike is “why are you bearish Northeast production?”. The short answer is, we’re not. We’re bearish US demand growth and very bullish Permian associated gas growth. Today, we’re going to focus on demand.
There are really only two buckets that can meaningfully impact our forecast in a positive manner when it comes to demand over the next 5 years. They are LNG exports and Mexican exports. Yes, power burn will contribute, but not to the same degree.
Currently, Sabine Pass is commanding as much gas for liquefaction on a daily basis as major New York City LDCs during the Bomb Cyclone. With the recent addition of Cove Point and impending in-service dates for a handful of other facilities, LNG export demand is certainly a producer’s best friend. But, with big rewards come big risks, Freeport’s announcement of a delay last week cut an average of 450 MMcf/d and 630 MMcf/d of demand out of our forecast in 2018 and 2019, respectively…ouch.
Mexico, our saviors to the South? Don’t get me wrong, Mexican demand is material and has certainly been a nice addition to the demand stack lately. One of the first things that jumps out when analyzing the recent growth in gas exports to Mexico is the almost 1:1 match in Mexican production declines. The market is still waiting on demand associated with the buildout of new gas-fired power generation. The other challenge in getting excited about Mexican demand growth is the amount of construction that must be completed to get the gas to major population centers. Currently, we see the majority of demand growth coming from South Texas and not providing the much-needed relief at Waha in the near to medium-term.
As long as WTI is trading above $50, ample associated gas will compete for a finite amount of demand putting a cap on just how much Northeast gas production is needed over the next several years. To find out just how bearish we are Northeast production, request a free sample of our Northeast Gas Outlook or dig into our demand assumptions through our Henry Hub Outlook.