Mother Nature will determine NGas prices in 2025
Posted: Tue Nov 19, 2024 11:26 am
Notes below are from HFI Research. Subject: Wide Range of where Natural Gas prices could go in 2025
What happens if heating demand is just normal? < As I have posted here many times, we don't need a colder than normal winter to set up a bullish outlook for U.S. and Canada natural gas prices. We just need an average/normal winter.
Lower 48 gas production will be negatively impacted due to the colder-than-normal weather. We estimate that at least 2-2.5 Bcf/d of gas production will be impacted by the freeze-off. For oil production, this equates to 300-350k b/d of production being impacted.
Lower production coupled with a surge in heating demand will result in meaningfully higher storage withdrawals. While you can make the usual assumption of correlating HDDs with storage withdrawals, the drop in production will magnify the draw size. Realistically speaking, we could see end-of-season storage drop to 1.35 Tcf this winter if Lower 48 gas production averages ~104 Bcf/d from now until April 2025.
But what happens if we get a repeat of 2023/2024?
Lower 48 gas production is currently on pace to reach ~105 to ~106 Bcf/d by year-end.
The increase in production will put natural gas balances close to that of the 2023/2024 winter. And with storage levels well above where we ended 2023, the implied surplus will be very bearish for prices.
From start to finish, the 2023/2024 winter saw a storage withdrawal of 1.52 Tcf. For 2024, natural gas storage peaked at 3.972 Tcf. A withdrawal of 1.52 Tcf would put storage at 2.452 Tcf or nearly +700 Bcf versus the 5-year average.
If such a scenario happens, you can rest assured that natural gas prices will average below $2/MMBtu for the entirety of the injection season, and natural gas equities will get demolished as a result.
The symmetry is not favorable...
I have no idea what the winter weather outlook will look like, but I can tell you this: the symmetric payoff in the two scenarios I described above makes me want to keep avoiding natural gas until this winter ends. On one hand, a bullish winter will catapult prices higher, and natural gas equities may rally another 15-20%. On the other hand, a warmer-than-normal winter could crash prices worse than the price drop we saw this year.
This is why the natural gas market desperately needs a normal winter. The current surplus in natural gas is the result of two back-to-back bearish winters. If we have a 3rd one in a row, natural gas balances will be skewed out of whack, and the market will have to force balance by pushing prices back to the shut-in price again.
For now, Mother Nature is trending in favor of the bulls, but how long will it last? For the sake of the bulls, they need it to continue, or else it will be very difficult to eliminate the surplus we have in storage especially with production expected to increase into year-end.
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MY TAKE:
I am a believer in "Climate the Same". The last two winters have been colder in the western third of the U.S. and warmer in the eastern half of the U.S., which is where the majority of homes use natural gas for space heating. We just need a normal winter combined with increasing LNG exports for storage to end up below the 5-year average by the end of March.
The safe way to play this, if you believe U.S. natural gas prices will firm up above $3.00, is to avoid "Concentration Risk". EQT Corp. (EQT) and Comstock Resources (CRK) are almost pure gassers, so they have more exposure to natural gas prices. EQT does a much better job of hedging. ~50% of EQT's 2025 natural gas volumes are hedged at a blended price of around $3.20/mcf. My 2025 forecast based on a realized natural gas price of $2.97/mcf shows EQT generating $4.4 billion of operating cash flow next year, which should give them $1.5 billion of free cash flow.
All of the Sweet 16 companies produce a significant percentage of natural gas and NGLs. You can see the percentages on Tab 2 of the Sweet 16 Summary Spreadsheet.
What happens if heating demand is just normal? < As I have posted here many times, we don't need a colder than normal winter to set up a bullish outlook for U.S. and Canada natural gas prices. We just need an average/normal winter.
Lower 48 gas production will be negatively impacted due to the colder-than-normal weather. We estimate that at least 2-2.5 Bcf/d of gas production will be impacted by the freeze-off. For oil production, this equates to 300-350k b/d of production being impacted.
Lower production coupled with a surge in heating demand will result in meaningfully higher storage withdrawals. While you can make the usual assumption of correlating HDDs with storage withdrawals, the drop in production will magnify the draw size. Realistically speaking, we could see end-of-season storage drop to 1.35 Tcf this winter if Lower 48 gas production averages ~104 Bcf/d from now until April 2025.
But what happens if we get a repeat of 2023/2024?
Lower 48 gas production is currently on pace to reach ~105 to ~106 Bcf/d by year-end.
The increase in production will put natural gas balances close to that of the 2023/2024 winter. And with storage levels well above where we ended 2023, the implied surplus will be very bearish for prices.
From start to finish, the 2023/2024 winter saw a storage withdrawal of 1.52 Tcf. For 2024, natural gas storage peaked at 3.972 Tcf. A withdrawal of 1.52 Tcf would put storage at 2.452 Tcf or nearly +700 Bcf versus the 5-year average.
If such a scenario happens, you can rest assured that natural gas prices will average below $2/MMBtu for the entirety of the injection season, and natural gas equities will get demolished as a result.
The symmetry is not favorable...
I have no idea what the winter weather outlook will look like, but I can tell you this: the symmetric payoff in the two scenarios I described above makes me want to keep avoiding natural gas until this winter ends. On one hand, a bullish winter will catapult prices higher, and natural gas equities may rally another 15-20%. On the other hand, a warmer-than-normal winter could crash prices worse than the price drop we saw this year.
This is why the natural gas market desperately needs a normal winter. The current surplus in natural gas is the result of two back-to-back bearish winters. If we have a 3rd one in a row, natural gas balances will be skewed out of whack, and the market will have to force balance by pushing prices back to the shut-in price again.
For now, Mother Nature is trending in favor of the bulls, but how long will it last? For the sake of the bulls, they need it to continue, or else it will be very difficult to eliminate the surplus we have in storage especially with production expected to increase into year-end.
-----------------------
MY TAKE:
I am a believer in "Climate the Same". The last two winters have been colder in the western third of the U.S. and warmer in the eastern half of the U.S., which is where the majority of homes use natural gas for space heating. We just need a normal winter combined with increasing LNG exports for storage to end up below the 5-year average by the end of March.
The safe way to play this, if you believe U.S. natural gas prices will firm up above $3.00, is to avoid "Concentration Risk". EQT Corp. (EQT) and Comstock Resources (CRK) are almost pure gassers, so they have more exposure to natural gas prices. EQT does a much better job of hedging. ~50% of EQT's 2025 natural gas volumes are hedged at a blended price of around $3.20/mcf. My 2025 forecast based on a realized natural gas price of $2.97/mcf shows EQT generating $4.4 billion of operating cash flow next year, which should give them $1.5 billion of free cash flow.
All of the Sweet 16 companies produce a significant percentage of natural gas and NGLs. You can see the percentages on Tab 2 of the Sweet 16 Summary Spreadsheet.