(Public) Natural Gas - It's Just Not Meant To Be
It's a sad ending story. One filled with passion and love only to see the end result fall into shambles. Natural gas bulls and star-struck lovers have that in common. Sometimes, it's just not meant to be, and the culprit is none other than this villain here:
Natural gas producers have done it yet again. But as we have warned since the beginning of the year, US shale oil production will grow resulting in associated gas production outpacing oil growth. In addition, US shale oil wells will get gassier over time, so this will keep overall gas production elevated.
The end result is that Lower 48 gas production has now outpaced our expectations by ~3 Bcf/d. By our model, we weren't supposed to hit ~106 Bcf/d until late 2024 just ahead of the ramp-up in LNG exports. So with production running 1-year ahead of schedule, 2024 balances look all but doomed. The only way out of this one is for Mother Nature to swoop in with one of the coldest winters in history, or else natural gas prices have much more room to fall.
Assuming a very normal winter, we have natural gas storage balances reaching ~1.875 Tcf, or 175 Bcf above the 5-year average (1.7 Tcf). We estimate the current oversupply to be ~2 Bcf/d.
Adjusting for the near-term bullish weather, we estimate the normalized surplus to be closer to ~3 Bcf/d.
If you were to extrapolate this throughout 2024, it's not a pretty picture. Here's the simple math:
There are 31 weeks in the injection season.
The 5-year average injection total is 1.989 Tcf.
A 3 Bcf/d surplus will result in an excess injection of 651 Bcf.
Total injection could be as high as 2.64 Tcf.
Now if you add 2.64 Tcf to 1.875 Tcf, you end up with 4.515 Tcf in storage by November 2024. That is about as bad as bad gets. Now that's an easy assumption to make and any natural gas trader with access to a calculator can do that. So the important questions going forward are:
What do the rest of winter balances look like? Weather is going to play 90% of the role in that.
Where is Lower 48 gas production by the start of injection season? We think it's lower at around ~104 Bcf/d.
What does summer demand look like? Once again, weather will influence ~50%+ of that.
In aggregate, it's still far too early to say that natural gas is completely doomed. But as you can see from this exercise, if you are betting on natural gas prices to significantly move higher, you are looking at a very low probability event.
It's just not meant to be...
The takeaway from this article is straightforward. At the current production level, natural gas balances in 2024 look doomed. Our expectation is that production will fall in Q1 and into Q2 giving the natural gas market some room for relief, and Mother Nature could always prove to be colder than normal providing further relief.
But as it stands today, balances in 2024 look awful. And the US gas producers have time and time again proved why the nickname "motherfracker" was given. It's the nightmare that keeps on giving. Like a horror film that never ends, the market may have to force discipline in producers by punishing prices lower.Â
Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.