U.S. natural gas prices set for sustained rally

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Record LNG exports and abnormally high demand for electricity have combined in recent weeks to push U.S. gas prices considerably higher than they normally are at this time of year. And this may just be the beginning.

Gasoline prices have doubled since the beginning of the year; that could increase another 25% if the summer turns out to be hotter than normal, CNBC reported Last week. The report quotes a senior analyst from S&P Global Community Insights who noted that natural gas production is not growing fast enough to meet growing demand, which could only push prices even higher.

“Natural gas prices in Asia and Europe are $35 per mmbtu, compared to $8.20 per mmbtu here in the United States. Given the underlying fundamentals that have now developed in US gas markets, we believe prices are poised to rise and converge with international prices over the next six months,” the company wrote. investment in natural resources Goehring & Rozencwajg in its latest quarterly market commentary.

The report details the evolution of the current energy crisis in Europe and how it has pushed prices to current all-time highs, starting with the colder-than-usual end of winter last year, which pushed demand, leaving stocks lower than normal because Russia was not pumping. additional gas in addition to its contractual volumes.

In the months that followed, the situation worsened as demand for natural gas, especially LNG, also remained strong in Asia. At the start of the new heating season in Europe, natural gas fundamentals were extremely bullish and sparked the price rally that pushed natural gas to prices equivalent to $300 a barrel of oil. And all of this, as Leigh Goehring and Adam Rozencwajg note in their report, happened before Russia invaded Ukraine.

Meanwhile, the United States is benefiting from a stable supply of natural gas and an increase in LNG exports – so much so that plans are in place to create additional LNG export capacity to satisfy a Europe thirsty woman trying to wean herself off Russian gas – if she can. .

“Almost everyone takes it for granted that gas production in the United States will continue to grow strongly during this decade,” wrote Goehring and Rozencwajg. “With production nearly doubling over the past 10 years, few analysts even bother to consider underlying shale gas supply issues. But something else happened that receives no comment – never before has production been concentrated in so few fields.

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The report’s authors went on to explain that just two shale deposits – the Marcellus Shale and the Haynesville Shale – account for up to 40% of total natural gas production in the United States. Permian associated gas contributes an additional 12% of the total. And production won’t increase forever because it never will. The question, according to the report, is when production will begin to decline, as it has in the Barnett Shale and Fayetteville.

“We will definitely go over $10. I would put $12 to $14 as the top bracket,” Again Capital partner John Kilduff told CNBC last week. “It’s a commodity that trades a lot parabolically. It’s no stranger to parabolic up and down moves. It’s incredibly volatile and it also has the ability to reset. We could come in at $10 or $12 $ and if you have a cool August, you could drop back below $8.

Kilduff seems to be referring to current demand versus supply patterns. According to Goehring and Rozencwajg, the price of US gas could rise significantly as “the US gas market moves from even marginal surplus to marginal deficit”. The question of production trends in US shale gas then becomes all the more pressing.

According to Goehring and Rozencwajg’s analysis based on production patterns from the Barnett and Fayetteville shale deposits, Marcellus could be close to peaking and plateauing before production begins to decline – production could reach a plateau over the next 12 months. This would be bad news because, after the plateau, shale gas fields seem to be going straight into a sharp drop in production. This sharp decline could begin in 2025.

The situation is not much different for the Haynesville shale play, although the patterns of production growth there have been less linear than those of the Marcellus. Even so, the authors expect gas production there to plateau by October 2023.

In other words, within the next year, the shale plays that account for 40% of gas production in the United States may well peak in production rates and soon begin to decline. Demand for LNG, meanwhile, is most likely to remain as strong as it is now, if not stronger – after all, the EU is in a frantic race to cut all imports from Russia. The current rise in gas prices in the United States could therefore only be the start of a sustained price recovery.

By Irina Slav for Oilprice.com

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