Lower natural gas output volumes are needed to reverse suddenly weak prices in 2023, several analysts said in new outlooks. Yet, they also cautioned exploration and production (E&P) firms against scaling back too aggressively because U.S. export demand is poised to surge in coming years.
“Prices have been spiraling,” and “there is little upside potential in sight” until production pulls back, said Rystad Energy analyst Ade Allen. “As many players accept the likelihood of sustained low prices, operators are hinting at reduced activity through 2023.”
While this includes major players such as Chesapeake Energy Corp. and Comstock Resources Inc. across multiple plays, a majority of the cuts are likely to be “heavily skewed towards private operators in the Haynesville Shale and a few public operators in Appalachia,” according to Allen.
Conditions early this year marked a sharp turn from 2022.
Soaring natural gas prices last spring and summer – following Russia’s invasion of Ukraine and amid heat waves that drove strong cooling demand – propelled New York Mercantile Exchange (Nymex) prompt-month futures to 14-year highs near $10.00/MMBtu. Prices held strong through December during early blasts of winter.
But gas prices tapered off quickly early in 2023 as the second half of winter has so far proved unseasonably mild across much of the Lower 48 and near-term LNG demand has leveled off. European countries that shunned Russian gas and turned to U.S. liquefied natural gas to fill the void successfully stocked up on winter supplies. The Freeport LNG facility, forced to shut down last June following a fire, also curbed demand for U.S. gas.
Production, while creeping lower, remains elevated around 100 Bcf/d – after hitting record levels above 102 Bcf/d late in 2022.
Prompt-month futures recently hovered around $2.700/MMBtu – and much lower earlier in previous weeks.
“Warm weather and LNG delays pushed Henry Hub gas to two-year lows,” Bank of America analyst Francisco Blanch said. “The U.S. natural gas market is back to where it started in 3Q2020, after a spate of mild weather caused Henry Hub prices to slide below $2.30/MMBtu.”
Blanch noted that, with production still strong and demand relatively light, supplies in storage are robust relative to historic norms, adding to downward price pressure. Inventories as of Feb. 17 – the most recent government data – stood at 2,195 Bcf. That compared with the year-earlier level of 1,800 Bcf and the five-year average of 1,906 Bcf.
Freeport LNG Impact
Early last summer, prior to Freeport LNG’s shutdown, natural gas futures were trading above $9 and U.S. inventories were about 300 Bcf under seasonal five-year average levels, Blanch said.
“Since then, mild weather and strong production growth caused the balances to flip...a dynamic that has also played out in Europe,” he said. “The recent reversal of fortune has sent gas prices lower in search of a response from supply or demand.
“Fortunately,” Blanch added, recent fourth quarter earnings releases from the likes of Chesapeake and Comstock “suggest E&Ps are cutting rigs” and more notable declines in production are on the way.
While output is high early in 2023, coming declines could leave production roughly flat for the year. On the demand side, U.S. LNG exports could rise 1.38 Bcf/d this year as Freeport, in the restart process now, gets back to full operation mode ahead of the summer cooling season. This could help offset the recent weather-driven consumption weakness.
This would allow benchmark natural gas prices to average $2.70 in 2023, Blanch said. “Henry Hub gas prices should remain depressed in 1H2023, averaging $2.45 before rising in 2H2023 as the impact of low prices on production becomes clearer,” he said.
Goldman Sachs Group analyst Samantha Dart also expects market supply/demand adjustments to help balance the market and support higher prices this summer – around the $3.50 level. All three Nymex summer months contracts are currently trading below $3.00.
“We maintain our view that current summer 2023” futures price levels “are too low and would, if sustained, ultimately tighten storage too much ahead of the next winter,” Dart said. That noted, “we believe the steepness of the drop in prompt U.S. natural gas prices reflects that the market remains in a ‘show-me’ mode, looking for a fundamental response in balances at lower price levels for reassurance that storage will avoid breaching capacity ahead of next winter.”
Prices Beyond 2023
BTU Analytics’ Matt Hagerty, senior manager of energy markets, said the recent abundance of supply was driven in large part by growth in associated gas, a by-product of oil production.
He said that, while a pullback in associated gas output would help near-term prices, it could prove detrimental to long-term energy needs. Hagerty said demand is expected to prove robust from both Europe and Asia for years, given anemic domestic supplies on both continents. As such, multiple new American LNG facilities are in the works that will need U.S. supplies to meet export demand.
“Though growth in U.S. natural gas production is expected to slow in the near term in response to lower pricing, BTU Analytics forecasts a rapid rise in volumes in 2025 and beyond as a new wave of LNG export capacity materializes along the Gulf Coast,” Hagerty said.
Rising Henry Hub prices in the second half of this decade are expected to fuel production growth from gas-directed regions, he said. However, more than two-thirds of the expected dry gas production growth through 2028, or nearly 12 Bcf/d, is expected to come from regions that are driven by oil output such as the Permian Basin, he said.
BTU Analytics expects global oil demand – and prices – to support associated gas output in coming years. But if this assumption proves too bullish and associated gas supplies are flat or down in coming years, a new round of energy inflation could bubble up quickly, Hagerty said.
While U.S. natural gas supply and demand is roughly balanced beyond 2024 in BTU Analytics’ forecast, he said, stagnant associated gas production could create a supply-demand imbalance of more than 7 Bcf/d by 2028. “While BTU Analytics doesn’t believe this imbalance will reach these levels, this scenario highlights just how important the activity in oil-directed regions is to meeting U.S. natural gas demand through the next five years,” Hagerty said.
“In all, without associated gas growth, markets would need to find balance elsewhere. Either production growth in gas-directed regions would need to accelerate significantly, almost certainly sparking inventory and infrastructure concerns, or demand would need to fall considerably,” he added. “Regardless, either solution would need to be spurred by a rapid rise in natural gas pricing.”
