U.S natural gas market is TIGHT - Sept 1

[dan_s]

Note received from Adam Rozencwajg this morning.

North American Gas Markets Now in Deficit
08/ 31/ 2021
Topics: Natural Gas Markets, Energy, Stocks

Tightness in the US natural gas market is beginning to manifest itself in low inventory levels. After having started the year at a 200 bcf surplus to the five-year seasonal average, US inventories now stand at nearly a 200 bcf deficit. Given the current trajectory, our models suggest we could end the injection season at 3.2 tcf of gas representing a 400 bcf deficit, or 700 bn cubic feet lower than the same time last year. If we are correct, inventories run the risk of starting the withdrawal season at the second lowest level in fifteen years. At that point, any bout of cold weather this coming winter would likely lead to a price spike.

Natural gas prices have been firming and currently stand at $4.39 (8/31/2021 closing price) compared to $2.36 on 12/31/2020. In fact, Henry Hub natural gas, which normally experiences price spikes in the winter due to heating demand, is at its highest seasonal level since 2014. Despite the rally, there has been little in the way of a drilling response. According to the Baker Hughes rig count, only 30 rigs have been put back to work since bottoming at 68 in July 2020. As of today, 97 rigs are drilling for gas compared with 200 as recently as 2019.

Since their initial development in the early 2000s, the US shale gas fields have completely overwhelmed US gas markets. Between 2007 and 2020, shale production grew by an incredible 68 bcf/d on a starting base of 50 bcf/d. Over that time, the shales represented 150% of total US production growth, with conventional supply declining steadily. Notably, the Marcellus (in Pennsylvania) and associated gas from the Permian (in Texas) were responsible for nearly 70% of that increase. In 2019, our neural network indicated that both plays were in the early stages of resource exhaustion. We predicted both basins would have a hard time growing at the same rate as in prior years and may actually begin to decline.

Our models appear to be correct. Between December 2019 and June 2021, the Marcellus has been flat while the Permian has added only 1.1 bcf/d. To put these figures into perspective, over the eighteen months between June 2018 and December 2019, the Marcellus added 6.5 bcf/d while the Permian added 5.5 bcf/d. In other words, Marcellus growth declined by 98% while Permian growth fell by 80%. While COVID certainly impacted drilling activity, recent production trends have not improved. Year to date, production from the Marcellus and Permian combined is down 250 mmcf/d.

If the shales stop growing, total US production would decline quite quickly. For example, total US dry gas production peaked in December 2019 at 97 bcf/d. As of April (the most recent month with complete data), US supply was down 4.5 bcf/d or nearly 5% to 92.5 bcf/d. Given that preliminary data suggests the shales declined between April and June, it seems almost certain total US dry gas production has continued to decline as well.

We now have another set of anecdotal data points suggesting the Marcellus is suffering the early stages of resource exhaustion. Two major Marcellus gas producers made significant acquisitions outside the basin during Q2. It is our belief they did so to bolster their quickly eroding inventory of remaining high quality drilling locations. On May 24th, 2021, Cabot Oil and Gas, long believed to be the best Marcellus operator, diversified into the Permian by merging with Cimarex Energy for $9 bn including debt. Our models have always suggested that, while Cabot had the best acreage in the gassier portion of the northeast Marcellus, its drilling inventory was not as extensive as most investors believed. Our neural network confirmed this view. We found it extremely telling when Cabot announced their unexpected merger despite never having discussed diversifying outside of the basin.

On June 2nd 2021, Southwestern Energy acquired private Haynesville operator Indigo Natural Resources for $2.7 bn. Just as with Cabot, the market was not expecting a material acquisition that diversified exposure away from the Marcellus. What is interesting about Southwestern is that they were the first mover in the Fayetteville shale in Arkansas in the early 2000s and an early pioneer in shale gas overall. They diversified basins by acquiring Marcellus assets from Chesapeake in 2014, making them one of the few operators to have fully developed a basin and then successfully reoriented into a new play. Perhaps they sense similarities between the Marcellus today and the Fayetteville in 2014.

While supply has been challenged, demand remains extremely strong. Global demand for LNG is robust as weather events and strong economic demand from China and others has led to surging prices and tight markets. Notably, high temperatures across Asia have led to strong demand for electricity to power air conditioning in Bangladesh and India (a sign of the S-Curve). At the same time, Brazilian drought conditions have resulted in lower-than-normal hydro availability. Global spot LNG prices averaged $14 per mmbtu, the highest levels since 2013 and above oil-linked parity. Exported US LNG has clearly had no problem being absorbed in the global market, despite having grown from nothing as recently as 2017 to an incredible 10 bcf/d today — up 3 bcf/d in the past year alone. We have long argued that global demand for LNG was much greater than anyone believed possible. As emerging countries become wealthier, they seek cleaner forms of power of which natural gas is the most effective. Gas bears have long argued that excess natural gas supply will eventually break the linkage between global LNG prices and oil prices that has long been central to long-term LNG contracts. The fact that spot LNG today trades above its oil-linked parity (6 mcf of ngas = the energy in 1 bbl of oil) suggests to us the market remains very tight. We continue to believe that the global seaborn gas market will continue to absorb new capacity from the US going forward.

The main challenge faced by US natural gas has been the unrelenting growth of the Marcellus and Permian. If we are correct and both plays are entering the early stages of exhaustion, then a new gas bull market has likely started. Production data seems to suggest we are correct and now anecdotal evidence among the producers points that way as well. Inventories are now beginning to get tight relative to seasonal averages and the US will likely enter the withdrawal season vulnerable to any bout of colder-than-normal weather. The great bull market in natural gas has begun.
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MY TAKE: The key point is that traders keep looking at the amount of ngas in US storage compared to the 5-year average. Demand for US gas is MUCH HIGHER than it was 5 years ago. Today the US is exporting over 10 bcf per day of LNG and exports to Mexico have increased. 5 years ago we were a net importer of gas. I believe we will see the "Mother of all Bidding Wars" in Q4 2021 for gas supplies between the utilities and the exporters.

[Fraser921]

What I dont understand is why dont the gassers unwind their crap hedges at 2.50-2.75 and let them roll.

We been talking about shortages for months, are they clueless?

Id be all in with comstock but they have tremendous crap hedges, same with rrc,eqt,cnx,gdp

We might see $ 5 ng today , now 4.65 for October!!

[Fraser921]

US DoE Crude Oil Inventories (W/W) 27-Aug: -7169K (est -2500K; prev -2980K)

Distillate: -1732K (est -550K; prev 645K)
Cushing: 836K (prev 70K)
Gasoline: 1290K (est -1600K; prev -2241K)
Refinery Utilization: -1.10% (est 0.35%; prev 0.20%)

[dan_s]

I know most of the gassers have Bad Hedges to work off, but those hedges are relatively short-term problems. What they should do is us the coming price spikes to lay on some collars with very high ceiling.

Keep in mind that most of them have hedging programs in place to make sure they have sufficient cash flow to meet debt service if there is a prolonged decline in the gas price. AR has done a fantastic job of paying off a lot of debt and restructuring their debt this year.

Year end reserve reports based on much higher prices at 12-31-2021 will show the market how grossly under-valued these companies are.

Comstock (CRK) has approximately 39% of their Q4 gas hedged with Swaps at $2.53 and another 28% hedged with collars that have $3.05 ceilings, so they have 33% of their Q4 gas that is unhedged. As of 8-3-2021 less than 50% of Comstock's gas is hedged for 2022. Plus, this is very important, any of their gas that is not committed to pipelines under contracts tied to NYMEX prices can be sold at spot market prices at huge premiums during bidding wars. My $18.25 valuation of CRK is based on much lower gas prices than I now expect them to "realize". All of my stock price valuations take in to account each company's hedges.

This year may be different, but the Wall Street Gang usually doesn't pay much attention to gassers until we get to November. My "job" is to keep EPG members a step ahead of the Wall Street Gang.

[dan_s]

Note this morning from ScotiaBank Equity Research Team

The September 2021 contract settled on Friday at $4.37/mmBtu, placing
the 3Q21 average Nymex price at $4.01/mmBtu, the highest since 3Q14. < Compare to the Q3 ngas price of $3.50 used in my forecasts.

With the 2022 strip at $3.70/mmBtu and 2023 at $3.09/mmBtu, we believe producers are
actively locking in pricing, with private operators likely considering some moderate
growth plans. Even as pricing has risen, the natural gas rig count remained steady
last week at 97. Internationally, JKM and TTF strips jumped an average ~12% week
over week (w/w) to new highs after last week’s pullback. < JKM is the Japan/Korea and TTF is the Europe price for delivered LNG.

Moving to Hurricane Ida’s impact on U.S. gas markets, we expect some demand destruction but don’t
anticipate it will be material.

[Fraser921]

Propane is now below the 5 year averages.

I read that Pakistan has cancelled their LNG imports, too expensive and now will burn coal. Same with India. Problem is they only have a one week supply of coal at utilities. They dont give a damn about climate change crap nonsense.

[mrbill]

Louisiana is running on propane and gasoline generators now. Lines are long at gas stations, if there is a supply.
Dan was right about gas supply post hurricane.