The combination of relatively soft weather-driven demand and record production put the U.S. natural gas market on a path to price-pressuring oversupply well into 2024, a growing chorus of analysts cautioned in November.
“We are bearish on U.S. natural gas,” Goldman Sachs Group’s Samantha Dart said bluntly.
First things first: U.S. production reached record levels around 106 Bcf/d at points in November. It remains elevated and consistently near or atop 105 Bcf/d, according to both Bloomberg and Wood Mackenzie estimates.
Stout production from key regions such as the Haynesville Shale – and complemented by robust output of associated gas from the Permian Basin – propelled the supply levels.
Producers in dry gas-rich areas are forging ahead in anticipation of substantially stronger long-term demand for LNG with the expected arrival of new export capacity coming online along the Gulf Coast late next year. Permian supplies are solid with ongoing strength in oil production in the prolific basin. Associated gas is produced alongside crude.
Continually advancing technology and production efficiency improvements bolstered volumes as well.
This all developed after a relatively mild 2022-2023 winter in several sections of the Lower 48 that resulted in modest heating demand. The summer months proved hot in 2023 – but not as extreme as the record temperatures of 2022, conditions that came alongside global supply interruptions imposed by Russia’s invasion of Ukraine.
In 2022, Western sanctions against the Kremlin and Russia’s retaliation resulted in gas shortages in Europe. Russia cut off most of the gas it had sent via pipeline to the continent pre-war. However, thanks in large part to U.S. shipments of liquefied natural gas, Europe has since restocked and currently has an abundance of gas in storage, as Dart noted.
Meanwhile, U.S. supplies in storage at 3,826 Bcf as of Nov. 17 were 7% above the five-year average. Stocks exceeded the five-year average in every section of the Lower 48, with underground supplies in the Mountain region 23% ahead.
Even the Pacific region, strapped for gas as recently as this summer, had 8% more of the fuel in storage by mid-November than the five-year average. This was due in part to strong levels of Canadian imports that have helped keep total Lower 48 supplies above 110 Bcf/d this month.
“We believe balances remain oversupplied heading into 2024,” Dart said. “Barring a colder-than-average winter, we expect that current forward prices would put storage on a path to congestion by the end of next summer.”
All of this has both natural gas futures and spot market prices relatively low this year, even as demand begins to build ahead of the winter heating season. Henry Hub futures in recent sessions held below $3.00/MMBtu – far from the nearly $10 peak of 2022 – and cash prices are similarly subdued. NGI’s Weekly Spot Gas National Avg. for the Nov. 20-22 period, for example, slipped 2.0 cents to $2.850.
LNG To The Rescue?
Analysts widely expect production to remain high well into 2024, keeping a ceiling on prices potentially until the increased LNG demand comes into play in the second half of the year.
Tudor, Pickering, Holt & Co. (TPH) analyst Matt Portillo estimated natural gas production would average 103.6 Bcf/d in the year ahead. This could put end-of-winter storage at 2 Tcf and end-of-injection season storage at 4 Tcf next fall – near capacity.
He said TPH now sees futures averaging $2.75 in the first half of next year, down from a previous estimate of $3. Low prices, he said, could “potentially slow” producer activity in coming months, though there are no clear signs of strong pullback yet. He cited the need to meet long-term demand. Given the staffing, equipment and momentum needed to drive output, producers cannot simply pull back sharply this winter and then flip a switch back to record levels in ensuing months.
To be sure, natural gas rig counts have declined notably over the course of 2023 amid lower prices. The total of 117 natural gas-directed rigs active as of Nov. 22 was down from 155 a year earlier, according to the latest Baker Hughes Co. tally.
The latest total, however, included a three-rig week/week gain, noted EBW Analytics Group’s Eli Rubin, senior analyst.
“At a high level,” the most recent total of 117 was “flat to mid-August as the trend of a falling rig count has stabilized,” Rubin said. This comes as forecasts call for a mild December and, potentially, a relatively benign winter overall, he said. An El Nino weather pattern developed this year. Historically, such patterns have resulted in warmer northern temperatures and less snow.
“Looking forward, while winter weather remains the elephant in the room, the fundamental setup is increasingly indicative of massive natural gas oversupply in spring 2024 – potentially putting renewed pressure on producers,” Rubin said.
“At the same time, however, a tsunami of LNG exports beginning in the back half of next year has gas producers aiming to maintain productive capacity, and many drillers already at replacement-level production may face difficult decisions to trim output further,” he added. “Well-hedged producers may look past developing fundamental weakness toward structural demand growth – potentially worsening the extent of likely oversupply in the first half of next year.”
