Natural gas prices have risen as a result of a trifecta of extreme heat, increased exports, and lower production. Production is still not back to pre-pandemic levels. At the same time, supply in US storage is lower than the five-year average.
Some energy analysts were taken aback by the rally and now expect prices to remain high. The question is how high they will go and how long they will stay there. They do admit that temporary price increases are possible, but they do not anticipate a prolonged period of rapidly rising prices.
“Natural gas is simply a market that is prone to significantly higher prices as a result of extreme weather events. That is especially true with a balance like this,” said Chris Louney, commodity strategist at RBC Capital Markets.
Gas stocks are rising, as are gas futures.
Stocks in companies that produce or sell natural gas rose on Wednesday as the price of natural gas futures approached $4 per million British thermal units, or mmBtus. Natural gas futures for August were up as much as 1.8 percent Wednesday afternoon, trading at $3.96 per mmBtu, a 7.4 percent gain for the week and nearly 24 percent gain for the month.
“EQT is the largest producer. We expect that stock to perform well if prices remain high,” said Brian Kessens, senior portfolio manager and managing director at TortoiseEcofin. EQT Corp.’s stock closed up 5%. In afternoon trading, Range Resources rose 5.3 percent and Antero Resources rose 6.4 percent.
Others were higher as well, including Chesapeake, APA Corp., and Southwestern Energy. Cheniere Energy, a liquified natural gas provider, gained less than 1%, while Kinder Morgan, a pipeline company, gained 2.5 percent. Based on the robust LNG market, Bank of America equity analysts raised their target price for Cheniere last week to $100 per share from $90 per share, a $16 increase from its current price.
Rising oil prices boosted oil and gas stocks in general. The S&P energy sector rose 3.5 percent on Wednesday, while crude rose 4.6 percent.
According to Kessens, gas producers have been held to the same standards as oil producers, and the price increase may help them expand production.
“They have promised to increase shareholder returns through dividends, stock buybacks, and debt repayments. If we have higher prices from here, they could do those three things as well as increase drilling cap ex,” he explained. “The margins should perform better. Their operating expenses are truly fixed, and any price increases are passed on to the bottom line.”
Summer means high prices.
The price of natural gas has reached its highest level since 2018, and this year should be the first time since then that gas prices average $3 per year, according to Kessens.
“The overall setup is just perfectly bullish,” says the author. John Kilduff, a Capital partner, stated once more. ”[The market] is oversupplied, and the hot summer has reduced the amount of gas in storage. This is the time of year when we need to stock up on supplies. This year has seen a record pace of liquified natural gas exports, which is also putting pressure on the inventory situation. It was a cold winter, and now it’s a scorching summer.”
According to Kilduff, the heat has had a significant impact on power company demand. The industry calculates “cooling degree days,” or days when air conditioning is used extensively based on temperature. There were one-third more of those days this year than usual along the East Coast alone. Meanwhile, temperatures in the country’s typically cooler northwestern region soared to record highs.
According to Kilduff, the amount of gas in storage in the United States is 2.6 trillion cubic feet, down from 3.1 trillion cubic feet last year and below the 5-year average of 2.8 trillion cubic feet. New government storage data will be released on Thursday at 10:30 a.m. ET.
TortoiseEcofin predicts that the average price will be slightly higher than $3 per mmBtu this year, and around $3.50 per mmBtu next year.
According to Louney, his highest target price scenario for natural gas this year is an average of $2.97. The national average is already $2.93. However, he anticipates increased output next year, and his mid-term target for 2022 reduces the average to $2.70 per mmBtu.
Storage levels, according to Louney, have kept prices high. The price was “beyond our expectations going into the season,” he said.
“It’s stronger and more sustained than we thought,” Louney added. “I believe we will reach a reasonable level of storage this winter. I believe there will be enough gas in storage. However, this implies that prices will rise. Is it going to set a new low? No, I don’t think so. Just as tight balances are keeping prices elevated, I believe tight balances will continue to be a theme for the year.”
“I was preoccupied with inventories.”
According to Francisco Blanch, head of commodities and derivatives strategy at Bank of America, the market is focused on inventories, but he expects producers to increase output in response to higher prices. Other factors affecting supply and demand, he says, include pipeline issues and lower wind output due to weather.
′′[Consumers] will have to pay more for electricity, but hopefully the higher price will increase production,” he said. Natural gas is used extensively by the chemical industry, pulp and paper manufacturers, oil refineries, and metals companies, in addition to power companies.
According to the US Energy Information Administration, total US gas production in April was 113.2 billion cubic feet per day, or bcf/d, including Alaska and offshore production. Pre-Covid, the EIA reported December 2019 production at a high of 117 bcf/d.
Blanch predicted that dry natural gas production in the lower 48 states would increase to 93 billion cubic feet per day by October, up from 92 billion cubic feet per day in June. He anticipates that production will average 95.5 bcf/d next year. Blanch predicts that production in the lower 48 states will reach 97 billion cubic feet per day by the fourth quarter of 2022.
He stated that it was previously at 93.9 bcf/d.
While Blanch expects gas prices to average $3.35 per mmBtu in the second half of this year, he expects them to average $2.80 per mmBtu next year.
“We did change our minds a little bit, but we still have a bearish bias on natural gas,” he added.
Exports are becoming a larger part of the demand equation in the United States. According to analysts, the United States exports about 10 billion cubic feet of gas per day as LNG shipments, primarily to Europe and Asia. Demand in those markets has been increasing, and prices have skyrocketed, reaching the teens in Europe.
Aside from LNG, the United States exports gas to Mexico via pipelines.
“It is fair to say that our exports to Mexico account for about 7% [of total production]… which is something you really didn’t see five years ago,” Kessens said.
Analysts predict that LNG exports will continue to rise, with the United States serving as a swing producer in the global market.