Natural Gas Is Going To Bottom Soon
I am currently seeing a lot of confusion in the natural gas trading community. If the downturn in oil is going to be bad for US shale oil production, shouldn't that be immediately bullish for natural gas since associated gas production will fall?
Yes, but there's an issue with the timing.
Unlike 2020, when US shale oil producers were forced to shut-in production due to low prices, producers won't shut-in production this time. Instead, what we will see is a delay in drilling/completion activity, which will translate into a gradual decline in associated gas production.
Are we seeing that in the data right now?
No.
In fact, associated gas production is back to the all-time high, which is one of the many variables causing the recent sell-off in natural gas.
In addition, April balances have not been overwhelmingly bullish with injections slightly below the 5-year average.
And with LNG maintenance going on now, net supplies have increased to +2 Bcf/d y-o-y.
Demand
Net Supplies
With all that said, I think what we are seeing is close to the bottom in natural gas.
With summer contracts now trading around ~$3.7/MMBtu, I think there's an upside to $5/MMBtu this summer. If prices remain this low into the summer injection season, gas-to-coal switching (power burn) would remain low, which would push power burn demand higher.
Given the already tight balance we see in natural gas coupled with the structural LNG demand increase later this year, we think prices are biased to the upside.
