Texas markets

Recession fears and supply issues in Europe weigh on North American natural gas markets ahead of winter

With a U.S. recession looking more likely in 2023 and uncertainty surrounding natural gas flows from Russia to Europe, natural gas markets could experience a bumpy ride heading into the shoulder and winter seasons.

“Our baseline is that you will see a recession in 2023,” Macquarie Group Ltd chief economics officer David Doyle told NGI.

Doyle is scheduled to deliver the keynote address for the second day of the LDC Gas Forums’ Midcontinent Forum Sept. 12-14 in Chicago.

He cited the presence of many leading indicators that historically preceded economic contraction, including rapid wage growth and a spike in the cost of energy as a percentage of household income.

Notably, Doyle said, there has been “a shift in tone” recently from US Federal Reserve Chairman Jerome Powell compared to a few months ago. Earlier this year, the central bank still hoped to calm demand in the economy via interest rate hikes without triggering a recession.

Now, however, “the tone you’re getting from them…signals that they’re more willing to accept or tolerate the fact that a recession has become more likely, and probably even a necessary condition, to curb those pressures. inflationary,” Doyle said.

The price action in energy markets over the past year, while driven by many factors, paints a worrying picture for the economy heading into next year, it said. he indicates.

“A lot of times what you see is that before recessions and before downturns, you’ll see spikes in oil prices,” Doyle said. He said he was looking particularly carefully at spending on gasoline and energy goods as a percentage of income.

“When it’s skyrocketing, and it’s been skyrocketing in the last year year over year, it tends to foreshadow recession. Now it doesn’t work every time, but often when you see recessions it happens…and then before the recession it starts to come down because you start to see an easing in the price outlook,” Doyle said.

Mexico’s economic prospects are closely linked to those of its main trading partner, the United States.

Mexico’s central bank Banxico, in its latest quarterly report published on August 31, forecast core economic growth of 1.6% for the country in 2023. This figure is down from the previous quarter’s forecast of 2.4%. .

BBVA Research analysts also recently predicted growth of 1.6% for Mexico in 2023, compared to an earlier projection of 2.1%.

The International Monetary Fund, in the July edition of its World Economic Outlook report, predicted economic growth of 1% for the United States and 1.2% for Mexico in 2023.

Those projections were down sharply from the 2.3% and 2.5%, respectively, forecast in April.

Slow production growth

When it comes to natural gas, a potential recession is just one of many factors influencing prices in futures markets, according to NGI’s Leticia Gonzales, Price and Markets Writer.

“If you take a look at the Henry Hub futures curve, you’ll see a dramatic drop in prices starting next spring. However, it’s not necessarily because of recession fears,” said Gonzales, who is also set to speak at the LDC event. “However, there are other challenges, particularly with regard to supply chain issues.”

She explained that “the US gas market is currently quite tight in terms of supply and demand balances, particularly with only a few months before the official start of winter in the gas market. Storage levels have remained stubbornly low throughout the summer injection season, which can be attributed to a few different factors.

One such factor, she said, is that natural gas production “has been slow to grow as pipeline maintenance activities have pushed production back each time it passes a milestone. superior. We’re starting to see signs of recent highs of 98 to 99 billion cubic feet per day, but we’re about to enter shoulder season, and I expect to see further lows across the country as the market is preparing for winter.

[Mexico Matters: Cross-border energy trade between the U.S. and Mexico reached $42 billion last year. Understand this burgeoning trade flow — the projects, politics and natural gas prices — with NGI’s Mexico Gas Price Index. Know more.]

Looking further ahead, Gonzales said that “overall, the decline in futures prices for next year reflects the gas market’s view that supply growth is coming and demand will start to pick up. normalize a bit.

The U.S. Energy Information Administration (EIA), meanwhile, said Wednesday that it expects the price of Henry Hub natural gas to average about $9/MMBtu in the fourth quarter, then would fall to an average of about $6/MMBtu in 2023 as US gas production increases. .

Gross U.S. natural gas exports by pipeline, about three-quarters of which go to Mexico, are expected to average 8.72 billion cubic feet per day for the year 2022 and 9.49 billion cubic feet per day in 2023, said EIA researchers. These figures are up from the 8.47 Bcf/d recorded in 2021.

Futures pricing at the Houston Ship Channel, a key location for the Mexican market, showed a discount to Henry Hub of approximately minus 70 cents for October, minus 49 cents for November and minus 5.6 cents for winter 2022/ 2023 from Wednesday, according to NGI Future Prospects.

The Waha hub, which is gaining relevance for Mexico as its West Texas gas imports grow, posted even deeper base rebates of minus $2,118, minus $2,098 and minus $1,657, respectively. , for the same three periods.

Europe faced with the risk of winter supply

The European Union (EU), meanwhile, appears to be on track to meet its natural gas storage targets ahead of schedule as winter approaches, although the shutdown of the Nord Stream 1 pipeline has also fueled fears of an impending recession in Europe.

The EU should also have sufficient gas supplies for November and December, Rystad Energy analysts said on Tuesday. “However, there is a supply risk for the first quarter of 2023,” the consultancy said. The risk will increase if the Nord Stream 1 pipeline remains closed or operates at very low flow rates, and if there is a cold winter or late spring, the Rystad team said.

“There is so much uncertainty about whether Europe will be able to cope with a drop in Russian gas flows to the continent,” Gonzales said. “This has been made very clear in the gas prices we are seeing on the continent.

“But at the end of the day, weather dominates the gas market, especially in the winter season, and that will be true this year as well.”

Gonzales also noted that while U.S. LNG exports have grown significantly over the past year amid growing demand in Europe and Asia, no new liquefied natural gas export terminals are expected to come on stream in 2023. , which further limits Europe’s supply options.