Natural Gas Price Forecast from Wells Fargo as of 6/28/22
Posted: Tue Jul 05, 2022 8:50 am
Report I received this morning from my "spy" at Wells Fargo Equity Research. Note that they recommend AR, CTRA and EQT.
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TOPIC OF THE WEEK: What to expect from U.S. natural gas prices? Benchmark gas
prices (Henry Hub) have been extremely volatile in 2022, with a trading range of $3.58–
9.74/mcf ytd. Gas prices are down ~32% since 6/8. This week, we refresh our supply
demand model for U.S. natural gas to update our expectations for gas prices for the rest
of 2022, F2023 and beyond. Although we expect U.S. gas supply to grow by ~4bcf/d by
YE2022, we also expect U.S. natural gas inventories to be ~9% below the 2021 level by
October 31, 2022 — the end of injection season. Critically, the U.S. should have ~33 days
of demand on hand at the start of the winter — one of the lowest levels in recent years.
This should be supportive of near-term prices. Our new 2022/23/24 gas price outlook is
$6.57/5.62/4.50 per mcf vs. $4.57/3.50/3.25 prior, and Nymex at $6.11/5.10/4.60 as of
6/27/22. We highlight CTRA, CHK and AR as key U.S. E&P stocks to play ST strength in
U.S. natural gas prices.
Although markets have focused on LNG, domestic demand for gas was strong in 1H22.
Given the geopolitical tensions in Europe, investors have focused on LNG demand as a key
driver of higher gas prices. Indeed, U.S. LNG exports increased ~10% in 1Q21 and ~6% in
2Q22. Thus, in our opinion, markets overreacted to the news that ~2bcf/d of LNG export
capacity at Freeport would be down for at least 90 days (and ~1bcf/d till YE22). However,
based on daily pipeline data from Bloomberg, we note that domestic demand for U.S.
natural gas through June 2022 was ~5% above 1H21 levels led by Residential/Commercial
and Industrial demand. We estimate U.S. inventory on 6/27/22 stood at ~2.3tcf — 11%
below 2021 levels and represented only 22.1 days of demand or ~19% below 2021 levels
and ~27% below the 5-year average.
Natural gas inventories set to build, but still extraordinarily tight in 2022 / 2023. We
combine our updated outlook for U.S. natural gas demand (Appendix 2) with our forecast
of U.S. natural gas production (Appendix 1). Although the pace of weekly inventory builds
has 'normalized' in 2Q22, we expect the U.S. to exit injection season (October 31, 2022)
with ~3.3 tcf of gas in storage or ~9% below 2021 levels. Critically, this represents only
~33 days of demand on hand, well below the historical average of ~42 days. Thus, we
expect U.S. gas inventory levels to remain extraordinarily tight even incorporating above
market supply additions and conservative demand estimates that reflect an economic
slowdown in 2H22. This should be more supportive of near-term gas prices than the
~32% decline in spot Henry Hub over the last two weeks would indicate, in our opinion.
We expect a similar level of 'tightness' in 2023 as the U.S. adds ~0.5 bcf/d of storage even
assuming a ~0.7% decline in demand from lower economic activity.
Updating our Natural Gas Price Outlook to reflect above strip pricing in 2H22/2023,
with backwardation in 2024+. We are updating our outlook for U.S. natural gas prices
(Exhibit 22). Critically, we expect ~12-13% upside to recent Nymex prices in 2H22 and
~10% upside to strip in 2023. Our forecast in 2024 is in line with Nymex as we expect the
pace of inventory builds to increase, but given inflationary pressures and global macro/
geopolitical uncertainty, we raise our LT (2026e+) gas price outlook to $3.75/mcf vs.
$3.25/mcf prior. Note that this is ~17% recent Nymex prices.
How can E&P investors position for gas prices? In our opinion, CTRA, CHK and AR
represent the most beta to a recovery in near-term (2H22) gas prices given (1) low hedge
levels, (2) high cash return potential, and (3) opportunities for incremental capital returns.
Longer term, we would add EQT ($36.65) to the list.
--------------------------------
TOPIC OF THE WEEK: What to expect from U.S. natural gas prices? Benchmark gas
prices (Henry Hub) have been extremely volatile in 2022, with a trading range of $3.58–
9.74/mcf ytd. Gas prices are down ~32% since 6/8. This week, we refresh our supply
demand model for U.S. natural gas to update our expectations for gas prices for the rest
of 2022, F2023 and beyond. Although we expect U.S. gas supply to grow by ~4bcf/d by
YE2022, we also expect U.S. natural gas inventories to be ~9% below the 2021 level by
October 31, 2022 — the end of injection season. Critically, the U.S. should have ~33 days
of demand on hand at the start of the winter — one of the lowest levels in recent years.
This should be supportive of near-term prices. Our new 2022/23/24 gas price outlook is
$6.57/5.62/4.50 per mcf vs. $4.57/3.50/3.25 prior, and Nymex at $6.11/5.10/4.60 as of
6/27/22. We highlight CTRA, CHK and AR as key U.S. E&P stocks to play ST strength in
U.S. natural gas prices.
Although markets have focused on LNG, domestic demand for gas was strong in 1H22.
Given the geopolitical tensions in Europe, investors have focused on LNG demand as a key
driver of higher gas prices. Indeed, U.S. LNG exports increased ~10% in 1Q21 and ~6% in
2Q22. Thus, in our opinion, markets overreacted to the news that ~2bcf/d of LNG export
capacity at Freeport would be down for at least 90 days (and ~1bcf/d till YE22). However,
based on daily pipeline data from Bloomberg, we note that domestic demand for U.S.
natural gas through June 2022 was ~5% above 1H21 levels led by Residential/Commercial
and Industrial demand. We estimate U.S. inventory on 6/27/22 stood at ~2.3tcf — 11%
below 2021 levels and represented only 22.1 days of demand or ~19% below 2021 levels
and ~27% below the 5-year average.
Natural gas inventories set to build, but still extraordinarily tight in 2022 / 2023. We
combine our updated outlook for U.S. natural gas demand (Appendix 2) with our forecast
of U.S. natural gas production (Appendix 1). Although the pace of weekly inventory builds
has 'normalized' in 2Q22, we expect the U.S. to exit injection season (October 31, 2022)
with ~3.3 tcf of gas in storage or ~9% below 2021 levels. Critically, this represents only
~33 days of demand on hand, well below the historical average of ~42 days. Thus, we
expect U.S. gas inventory levels to remain extraordinarily tight even incorporating above
market supply additions and conservative demand estimates that reflect an economic
slowdown in 2H22. This should be more supportive of near-term gas prices than the
~32% decline in spot Henry Hub over the last two weeks would indicate, in our opinion.
We expect a similar level of 'tightness' in 2023 as the U.S. adds ~0.5 bcf/d of storage even
assuming a ~0.7% decline in demand from lower economic activity.
Updating our Natural Gas Price Outlook to reflect above strip pricing in 2H22/2023,
with backwardation in 2024+. We are updating our outlook for U.S. natural gas prices
(Exhibit 22). Critically, we expect ~12-13% upside to recent Nymex prices in 2H22 and
~10% upside to strip in 2023. Our forecast in 2024 is in line with Nymex as we expect the
pace of inventory builds to increase, but given inflationary pressures and global macro/
geopolitical uncertainty, we raise our LT (2026e+) gas price outlook to $3.75/mcf vs.
$3.25/mcf prior. Note that this is ~17% recent Nymex prices.
How can E&P investors position for gas prices? In our opinion, CTRA, CHK and AR
represent the most beta to a recovery in near-term (2H22) gas prices given (1) low hedge
levels, (2) high cash return potential, and (3) opportunities for incremental capital returns.
Longer term, we would add EQT ($36.65) to the list.