Drops in natural gas production, declining storage surpluses and stronger summer weather demand in the Lower 48 and abroad all line up in bulls’ favor. These factors could prop up prices through the cooling season and potentially longer, a cadre of analysts agreed this week.
Speaking at the LDC Gas Forums Northeast in Boston, Atmospheric G2 meteorologist James Caron said his firm’s seasonal forecasts call for “very, very warm” weather across most of North America and vast sections of Europe and Asia as well. The outlook mirrors predictions by AccuWeather and the National Weather Service.
Such conditions have already settled across parts of all three continents, and he looks for the heat to spread in the back half of June. The sultry temperatures are expected to endure through the summer months, he said, fueling robust domestic cooling demand, strong levels of pipeline exports to Mexico, and increased calls for U.S. shipments of LNG to Europe and Asia.
“We have a very bullish scenario setting up,” Caron said.
He noted that lofty sea surface temperatures also are entrenched across the Atlantic Basin, raising concerns about a particularly active hurricane season that creates a weather wildcard. Caron said hurricanes pack the potential to cut off power for prolonged periods, dampening demand. They also tend to deliver chilly winds and cloud cover, adding another bearish dose.
The National Oceanic and Atmospheric Administration predicted eight to 13 hurricanes and 17 to 25 named storms this year. An average season has 14 named storms, seven hurricanes and three major hurricanes.
However, Caron added, these storms can also stall production in the Gulf of Mexico (GOM). While GOM is no longer a leading source of natural gas – it dropped from 17% of U.S. marketed gas in 2005 to 2% last year, federal data show – any interruption would come on the heels of a sharp spring downturn in overall output. Total production declined from a record of about 107 Bcf/d in February to the 99-100 Bcf/d level in May and early June, according to Wood Mackenzie. What’s more, Caron said, once tropical storms pass through, they tend to leave exceptionally high humidity in their wake, driving cooling demand.
Jen Snyder, a natural gas consultant for RBN Energy LLC, said at the forum in Boston that she expects producers overall to continue treading lightly. Output could inch up in response to summer demand, but rig counts indicate producers remain conservative.
“The rig counts today really signal continued decline” relative to last summer, she said.
The U.S. natural gas rig count fell two units to 98 for the week ended June 7, Baker Hughes Co. (BKR) data show. The tally was down by 37 from a year earlier. Snyder cited pullbacks by major producers Chesapeake Energy Corp. and EQT Corp., though the latter said this week it is gradually bringing back curtailed output.
Snyder also said the Mountain Valley Pipeline (MVP) project, set to begin commercial operations this summer, would provide producers in the East a 303-mile, 2 million Dth/d Appalachia-to-Southeast natural gas pipeline. This would help pave a path for more production, but she said MVP is expected to slowly build toward full use. At first, less than half of its capacity is expected to be utilized.
East Daley Analytics’ Jack Weixel agreed. The analyst said at the forum that he expects production would rebound next year to meet a coming wave of liquefied natural gas demand with several new export facilities in the works along the Gulf Coast. But for the balance of this cooling season, rising demand could outstrip any increases in supply.
He said this could further curb natural gas storage surpluses that, as recently as March, topped 40% relative to the five-year average. The inventory surfeit declined to 25% at the close of May. It ticked down to 24% after the first week of June. Weixel said by the end of October, the surplus could essentially be eliminated, barring weather surprises.
Bulls Gather Momentum
This, Weixel said, helps to explain why prices, while choppy, are generally on the rise. The Henry Hub July futures contract lost ground Thursday, but only after it settled at $3.045/MMBtu on Wednesday, up 10% from a week earlier. NGI’s Spot Gas National Avg. stood at $2.125 on Wednesday, up 20.5 cents on the day and 19% higher than the same day the prior week.
Weixel does expect production to climb back by to an average around 106 Bcf/d next year as increased LNG demand begins to take root alongside domestic winter heating consumption.
Kevin Little, a managing director at Macquarie Group, also anticipates output to climb by 2025 – and perhaps as soon as this fall.
“We do see a significant ramp up in production,” he said at the conference. Against the backdrop of strong associated gas production in the Permian Basin and moving targets on some LNG projects, he said that, while “the demand growth is definitely real, we do need to curb our enthusiasm a little bit.”
Caron, the meteorologist, said long-range forecasts for the Lower 48 show the potential for pockets of strong winter demand. He noted that a La Niña weather pattern is developing this summer. When that happens, it historically has generated colder-than-average temperatures across the Mountain West and Midwest – major gas-consuming regions during the winter months. But he cautioned that long-range forecasts can be dubious.
In the meantime, NGI’s Pat Rau, senior vice president of Research & Analysis, agreed with Little that bulls are largely dependent on cooling demand in the near term.
“We've seen a big rally in July futures here in recent days on concerns about a hot summer, but now it will have to come to fruition,” Rau said. He estimated that since the beginning of April, Lower 48 natural gas burn for power generation is flat from what it was over the same period in 2023.
“Last year saw record demand for natural gas for power generation” in the summer, “and the market is expecting more of the same” during the current cooling season, Rau said.
