What’s Happening with Natural Gas?
Natural Gas prices fell to a 31-year low back in June. Now prices have surged breaking out of a narrow trading range with traders pointing to the largest single-day increase in more than 18-months. From my perspective, all of a sudden we have a hotter forecast for the back end of summer and at the same time an increase in liquefied natural gas export demand. If the demand grows ahead of winter buying interest, the bulls think we could start to quickly eat into what was deemed a huge stockpile but perhaps catch the industry offsides with many natural gas producers on the sideline.
Just this past week, Range Resources agreed to sell its North Louisiana natural gas assets for just one-tenth of what it paid for it in 2016. This is just another sign that the low commodity prices and high debt levels have taken a toll on many in the industry.
Williams, which owns one of the largest gas pipeline systems in the U.S., is saying they are seeing increasing demand, including big flows of natural gas to Mexico. From what I understand, the government officials in Mexico are trying to bring in natural gas to replace more expensive power generation in their markets. That might also end up being the theme in other parts of the world as cost savings become more important.
BofA analysts, including Peter Helles, are saying European and Asian demand for U.S. liquefied natural gas (LNG), is recovering and will be ramping up in 2021. The talk is LNG demand could really ramp up starting in September and rise strongly into the winter as Europe and Asia free up storage capacity. Driven by plummeting oil prices and the shutdown of local economies from the coronavirus pandemic, Latin America’s rig count fell to the lowest levels since 1982. There were only three natural gas-directed wells operating in Latin America in May, compared to 13 in March, and 24 a year ago. Venezuela, which has the largest oil reserves on earth, ran two rigs in May, compared to 25 in March. Argentina, after reporting zero active rigs in April, also ran two rigs in May. Keep in mind, here at home, at the end of July, U.S. energy companies were operating just 251 oil and gas rigs nationally, the same as last week and a record low for the industry, according to Baker Hughes, a Houston oil-field services company that has been tracking the rig count since the 1940s. There are 180 oil rigs, 69 gas rigs, and two maintenance rigs. Last year at this time we had about 162 natural gas rigs up and running in the U.S. and about 190 the summer before that. Furthering how bad it has gotten, Wyoming announced that they shut down the state’s last operating gas rig this week in Sweetwater County, dropping the state’s total rig count to zero. This marks only the second time the state’s rig count has reached zero since 1884, at the time, Wyoming was still a territory!
Think about it like this, oil production peaked in November 2019 at 12.86 million barrels per day, production has now plunged by over -22%. Natural gas is part of the mix of hydrocarbons produced from shale wells. In some producing regions, hydrocarbon liquids, such as crude oil, are dominant but with some associated natural gas. Others, such as the Marcellus Shale (Pennsylvania, West Virginia, eastern Ohio, western New York), produce large amounts of natural gas and fewer liquids. In ares were insufficient infrastructure exists to process and take away natural gas, it is flared (burned off). So when oil production booms, natural gas production booms too; and when oil production gets cut, natural gas production gets cut too – but not in lockstep. Production of natural gas peaked in November 2019 at 116.6 billion cubic feet per day and has since then dropped, including a massive -5.3% drop from April to May. In terms of cubic feet, the 5.9 million cf/d drop in May was the second-largest drop ever. The kicker is the US has become a net exporter of natural gas. This export demand now makes it tough to just shut things off.
Bottom line, bulls are thinking the natural gas balance sheet could tighten quicker than many are anticipating as demand ramps up all while U.S. gas production remains flat as the industry struggles with increased debt and overall business uncertainty. In other words, CEO’s that know their energy business is in trouble will find it difficult to make any big bets on expansion, growth, or bringing the company back to full-capacity and full-employment. Especially if the business leader deems the rally will be mostly a short-term blip on the radar screen, only to see prices fall back under pressure again by mid-2021. Remember, as we’ve all learned so often, higher-prices often cure higher prices. Meaning if prices rally high enough it won’t make much sense for global governments to make big shifts to Natural Gas. There’s also the coming headwinds being stirred by the “green hydrogen” activist that may also create some longer-term uncertainty.
As a user of fertilizer and as a speculator in the market, I feel like prices could continue to push higher into the winter months as the bulls might have enough of a demand story to catch the market flat-footed. I like the thought of buying in small doses on any big pullback. Producers or businesses that might have large exposure to rising Natural Gas prices need to be doing their homework and looking for ways to protect against a sizable nearby rally. My only concern is how long the rally can last? Will it fizzle out just as quickly as it started or will it run into mid-2021? Lots of unknowns in this environment with so many energy businesses caught overextended into a global pandemic. Wow, what a curve-ball… Below is a 24-Month Natural Gas chart.
