COM - Too Much Production Of Natural Gas

2024-01-04 22:30:00 ET

Summary

• Natural gas prices continue to drift under $3, suggesting further pricing pressure in the spring when demand falls.
• Production of natural gas has increased dramatically, primarily from frackers looking to dispose of their less lucrative product.
• Weather patterns and production losses will play a significant role in determining natural gas prices in the near future.

Too much of any good thing becomes a not-good thing. With natural gas ( NG1:COM ) ((NG)), too much production, like too big of an ice cream cone, weighs heavily on the price. During the past twenty-four months or so, NG prices reached $10 for a period, fell to under $2 for a short period, and now what should be peak usage and therefore higher prices, the price continues to drift under $3 suggesting further pricing pressure coming in the spring when demand falls. We chose the term or side of too much production rather than not enough demand because the recent increase in production primarily comes from frackers looking for a place to dispose of their less lucrative product, natural gas. For them, whatever price it gets, great. So how big is the ice cream cone? Can anyone eat it, or will it melt? Or does this size demise the mid-term future for prices? Let's go find out.

Changes in Production

From our own data collection gathered from weekly EIA report s, production jumped from 107 - 108 billion cubic feet per day in the summer to 110 - 111 billion cubic feet per day, the latest December numbers. The increase equals approximately 2-3%. Since spring the increase is much more dramatic increasing from 105 billion cubic feet per day. Adding to the production increases are three NG pipelines in West Texas coming online in the fall of 2023. Two of the pipelines are from Kinder Morgans and one is from MPLX. The total capacity increase equals 6 billion cubic feet per day. This transportation increase mostly seems to fall within the waste product category.

Storage

Some have other opinions, but the reality exists that the marketplace and pricing driver falls within the direction of storage. Included next is a graph once again provided by the EIA for weekly storage today and compared to 5-year averages. The cyan line is today's result.

What is important about this chart is deviations for natural gas from the 5-year average, darker line. Until early January of last year, the two were tracking at or under that 5-year number. Production increases coupled with an extremely warm winter, in the northeast, a prime user of NG in the winter, drove storage on the other side. NG prices plummeted from record highs just months before.

Weather Predictions

So, what do the weather patterns look like now? Thus far, this winter, meaning December, has also been unusually warm as a result of a persisting El Niño weather pattern. But investors may count on the weather service to always be 100% correct. The Weather Channel certainly covered its basis. In its look at the forecast for January , the Channel gave its El Niño report, cold in the southern U.S. and warm in the north. At almost the same time, it noted the strong probability for a pattern change, a polar vortex. This pattern allows for very cold from the upper pole to drift south into the northeast and sometimes even as far east into northern Europe. A version of this forecast with great details comes from Zero Hedge. Only time will tell the truthful tale. If the latter occurs, excess natural gas production will likely be consumed or mostly thereof. Like the used car salesman, by broadcasting with the forked mouth, they certainly guaranteed perfect results. But this isn't helpful for investing.

Demand Growth

From Commodities 2024: Coming US LNG supply wave to inch closer as new projects near startup:

Most of the North American capacity additions are not expected to materialize until the final months of 2024 before a wave of new supply arrives in 2025. Around 8.4 million mt/year of new capacity could be added by the end of 2024 on top of the 84 million mt/year of liquefaction capacity in operation currently, according to S&P Global Commodity Insights analysts.

By early 2025, additions could rise to around 18 million mt/year beyond current levels, with the expansion expected to reach more than 53 million mt/year over the course of that year."

The best estimate claims a 2% increase in LNG later in 2024 and with much higher increases in 2025.

Production Losses & Weather

For the near term, it's about winter cold and summer heat and/or production loss from reductions in drilling. In the Haynesville region, the traditional swing region, rig count has turned negative, but significant decreases in production haven't yet followed. Reductions can take time for wells to dissipate. With forecasters speaking from both sides as discussed, the allusive weather picture only remains allusive.

Risk

Pricing pressure likely continue until something clearly resolves the oversupply issue. A good means for investors to follow is in the EIA storage chart referenced above. Any deviation lower begins resolving pricing pressures.

Looking forward, one producer, one in which we hold a soft buy , Antero Resources ( AR ), with its very best-in-class assets and markets, continues to review data and advise investors that by the middle of 2025, supply shortages will once again be the norm (slide 20). With full disclosure for investors, Resources is unhedged.

In reality, the next 6-12 months for pricing depends on production losses and winter cold or summer heat. The new capacity is coming from the waste product pricing mentality. Those companies will take whatever price they can get. We are neutral with a slight negative seasonal slant on NG going forward through 2024. But this could change in a heartbeat. The ice cream cone, for now, is just too big, not a good thing.

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