Is it time to add more exposure to natural gas?
Posted: Fri Jun 16, 2023 11:03 am
We have four "gassers" in the Sweet 16: AR, CRK, EQT and RRC
Comstock Resources (CRK) is the company that is closest to a pure gasser. 99% of Comstock's production is dry gas from the Haynesville and East Texas.
As I have posted here several times, market forces are at work to rebalance the U.S. natural gas market after the historic warm winter of 2022/2023.
Here is why I now expect HH natural gas prices to move over $3.00/MMbtu within a few months:
U.S. gas-directed rig count has fallen for nine months.
The U.S. gas-directed rig count stood at 135 on June 9, according to Baker Hughes. This marks a new low since the cyclical peak at 166 during the week of September 9, 2022. Moreover, the U.S. oil-directed rig count also continues to be guided lower by Midcontinent cash crude prices. In turn, this process is reducing associated gas output from oil-focused drilling. On June 9, the U.S. oil-directed rig count stood at 556, down from 627 at its recent peak during the week of December 2, 2022. Together, the combined oil and gas rig count has declined by 11% over the past six months and remains on track to be down by about 40% by September 2023. < This is also why U.S. oil production has flatlined and will not get back to the pre-pandemic high of 12,860,000 bpd anytime soon.
U.S. gas production growth is slowing.
In 1Q2023, U.S. production reached 110.45 billion cubic feet per day (Bcf/d), an increase of +7.18 Bcf/d year on year, according to U.S. Energy Department statistics. This production has grown sequentially in 2Q2023 to reach 112.39 Bcf/d (+6.21 Bcf/d); however, the cuts to new drilling and other adjustments to existing production are finally having an effect. U.S. gas production is now expected to fall in 2H2023.
U.S. LNG exports have slumped by a larger than seasonal amount in 2Q2023, but they are likely to increase sequentially from here.
Gas deliveries into U.S. liquefaction terminals for export have been falling since making an all-time peak at 14.84 Bcf/d on April 17, 2023. Maintenance at Sabine Pass has accentuated the slump to 11.53 Bcf/d, but completion of those repairs will restore about 1.7 Bcf/d of the LNG demand that has been offline.
U.S. domestic gas demand also likely improves from here.
The warm winter and soft activity in manufacturing have caused U.S. gas demand to contract this year compared to last. Year-to-date, residential and commercial consumption is down 2.24 Bcf/d (–7.6%) and industrial demand is down 1.84 Bcf/d (–8.1%), according to the Genscape data. While industrial demand still looks spotty, demand from the power sector is strong and likely to get stronger: its trailing 12-month average is making new all-time highs above 34 Bcf/d. U.S. residential and commercial consumption of natural gas for space cooling is also likely to be stronger this summer than last as hot and dry weather is likely across most of the U.S. On June 8, the U.S. Climate Prediction Center formally confirmed emergence of El Nino conditions across the equatorial Pacific Ocean. Sea-surface temperatures in the Atlantic are also already demonstrably above normal.
This week’s miss on the U.S. gas storage injection number confirms a shift in risk.
I now expect weekly gas storage builds to be lower than the 5-year average during Q3. A warmer than normal July could wipe out more than 50% of the current surplus to the 5-year average. There is no "glut" of natural gas in the U.S. We still have plenty of ngas storage capacity.
This week's increase in NYMEX strip prices for HH natural gas has been driven by short covering. I expect more of that going forward.
Note from one of our very smart members:
"Valuation is confirmed by movement in cash basis prices. The cash price for natural gas at the Waha Hub has consistently been below the industry’s marginal cost of opex since March 7. Indeed, this price posted a subzero value as recently as May 9. This week, however, Waha has finally started to price above the marginal cost of opex. Moreover, the cash prices at Houston Ship Channel and Henry Hub are also catching a bid. This looks like the consumer side is beginning to tug prices higher even in the Gulf producing region. While this effect is not yet apparent in the Pennsylvania producing region (e.g., Dominion South Point, at $1.31 per MMBtu), it does appear that the futures are responsive. Aug-23 NYM natural gas (NGQ3, $2.61 per MMBtu) priced just +47 cents above Waha cash on June 14 and just +31 cents above Houston Ship Channel cash on June 13, for the tightest spreads throughout the supply adjustment that has been underway for the past nine months. Those spreads closed on June 15 at +68 and +52 cents respectively. This looks like a confirmatory breakout to us."
Comstock Resources (CRK) is the company that is closest to a pure gasser. 99% of Comstock's production is dry gas from the Haynesville and East Texas.
As I have posted here several times, market forces are at work to rebalance the U.S. natural gas market after the historic warm winter of 2022/2023.
Here is why I now expect HH natural gas prices to move over $3.00/MMbtu within a few months:
U.S. gas-directed rig count has fallen for nine months.
The U.S. gas-directed rig count stood at 135 on June 9, according to Baker Hughes. This marks a new low since the cyclical peak at 166 during the week of September 9, 2022. Moreover, the U.S. oil-directed rig count also continues to be guided lower by Midcontinent cash crude prices. In turn, this process is reducing associated gas output from oil-focused drilling. On June 9, the U.S. oil-directed rig count stood at 556, down from 627 at its recent peak during the week of December 2, 2022. Together, the combined oil and gas rig count has declined by 11% over the past six months and remains on track to be down by about 40% by September 2023. < This is also why U.S. oil production has flatlined and will not get back to the pre-pandemic high of 12,860,000 bpd anytime soon.
U.S. gas production growth is slowing.
In 1Q2023, U.S. production reached 110.45 billion cubic feet per day (Bcf/d), an increase of +7.18 Bcf/d year on year, according to U.S. Energy Department statistics. This production has grown sequentially in 2Q2023 to reach 112.39 Bcf/d (+6.21 Bcf/d); however, the cuts to new drilling and other adjustments to existing production are finally having an effect. U.S. gas production is now expected to fall in 2H2023.
U.S. LNG exports have slumped by a larger than seasonal amount in 2Q2023, but they are likely to increase sequentially from here.
Gas deliveries into U.S. liquefaction terminals for export have been falling since making an all-time peak at 14.84 Bcf/d on April 17, 2023. Maintenance at Sabine Pass has accentuated the slump to 11.53 Bcf/d, but completion of those repairs will restore about 1.7 Bcf/d of the LNG demand that has been offline.
U.S. domestic gas demand also likely improves from here.
The warm winter and soft activity in manufacturing have caused U.S. gas demand to contract this year compared to last. Year-to-date, residential and commercial consumption is down 2.24 Bcf/d (–7.6%) and industrial demand is down 1.84 Bcf/d (–8.1%), according to the Genscape data. While industrial demand still looks spotty, demand from the power sector is strong and likely to get stronger: its trailing 12-month average is making new all-time highs above 34 Bcf/d. U.S. residential and commercial consumption of natural gas for space cooling is also likely to be stronger this summer than last as hot and dry weather is likely across most of the U.S. On June 8, the U.S. Climate Prediction Center formally confirmed emergence of El Nino conditions across the equatorial Pacific Ocean. Sea-surface temperatures in the Atlantic are also already demonstrably above normal.
This week’s miss on the U.S. gas storage injection number confirms a shift in risk.
I now expect weekly gas storage builds to be lower than the 5-year average during Q3. A warmer than normal July could wipe out more than 50% of the current surplus to the 5-year average. There is no "glut" of natural gas in the U.S. We still have plenty of ngas storage capacity.
This week's increase in NYMEX strip prices for HH natural gas has been driven by short covering. I expect more of that going forward.
Note from one of our very smart members:
"Valuation is confirmed by movement in cash basis prices. The cash price for natural gas at the Waha Hub has consistently been below the industry’s marginal cost of opex since March 7. Indeed, this price posted a subzero value as recently as May 9. This week, however, Waha has finally started to price above the marginal cost of opex. Moreover, the cash prices at Houston Ship Channel and Henry Hub are also catching a bid. This looks like the consumer side is beginning to tug prices higher even in the Gulf producing region. While this effect is not yet apparent in the Pennsylvania producing region (e.g., Dominion South Point, at $1.31 per MMBtu), it does appear that the futures are responsive. Aug-23 NYM natural gas (NGQ3, $2.61 per MMBtu) priced just +47 cents above Waha cash on June 14 and just +31 cents above Houston Ship Channel cash on June 13, for the tightest spreads throughout the supply adjustment that has been underway for the past nine months. Those spreads closed on June 15 at +68 and +52 cents respectively. This looks like a confirmatory breakout to us."