Natural gas futures and cash prices surged early in the new year – bolstered by a barrage of winter freezes and production hits – then flopped amid forecasts for a return to benign weather and uncertainty about the trendline for supply.
Several analysts expect the rollercoaster ride to endure – at least for the near term.
Weather, of course, is the one constant catalyst, particularly in the heart of the heating season. Widespread frigid temperatures in the middle of January bolstered heating demand across the Lower 48 and caused wellhead freeze-offs that cut production by more than 10%.
Natural gas cash prices quadrupled just as the cold arrived in the second week of January. NGI’s Spot Gas National Avg. reached $16.77 at its early 2024 peak. Henry Hub futures also rallied 15% that week.
Output has yet to fully recover – in part due to prolonged freezes in the Bakken Shale of North Dakota -- but it is ticking back up alongside temperatures and forecasts for a substantial warm-up beginning this week. With those shifts, prices across both physical markets and futures retreated last week and remain subdued.
Production, which reached record levels above 106 Bcf/d late in 2023 and held at that level to start this year, dropped down near 90 Bcf/d at its low point during the January Arctic blasts. It reached 101 Bcf/d to start the current week, according to Wood Mackenzie estimates, and is widely expected to climb further as the Bakken thaws into February.
However, analysts say producers may stop short of returning to record levels to induce price support through winter.
“As output capability returns to normal these next few days, we reiterate the importance of watching production this week as a way to measure producer price sensitivities in what looks to be a continuation of a low-priced natural gas market looking forward,” analysts at Gelber & Associates said.
Futures market traders, in particular, are looking ahead to not only the degree of a production rebound but also a looming surge in LNG demand, Mexican calls for U.S. gas, and infrastructure expansions. With so many moving parts, prices could shift multiple times through the end of winter, into the spring shoulder season and beyond.
Strong production weighed down prices late last year when it overshadowed mild weather and soft domestic demand to start winter. While bears were emboldened then, the situation is complicated and, in time, could shift in bulls’ favor.
Export Demand
Importantly, producers ramped up last year – and could soon again – in anticipation of robust global demand and increased capability of American energy companies to meet it.
Multiple new U.S. liquefied natural gas facilities are in the works, with the first slated to open as soon as late 2024. More are expected to follow through this decade. Producers may choose to live with low prices early this year to ensure they are ready to meet a surge in demand in 2025 and beyond. New pipelines approved would add more than 20 Bcf/d of capacity to feed liquefaction trains coming online through the end of the decade, according to the U.S. Energy Information Administration (EIA).
The agency said production grew by 4.0 Bcf/d last year and could expand another 1.5 Bcf/d this year. But by 2025, EIA analysts cautioned, demand growth could quickly outstrip supply upticks.
Kinder Morgan Inc. CEO Kim Dang said she is forecasting 15% earnings growth this year for the Houston-based midstream giant in large part because of strong production volumes needed to support mounting export demand. Already, aside from weather-induced delays or maintenance projects, LNG feed gas demand is hovering close to current capacity. Prices, Dang said, are likely to move up with demand as the global market evolves.
“Our confidence is supported by the roughly 20% expected growth in the natural gas market between now and 2030, driven by LNG exports, exports to Mexico and industrial demand,” Dang said on the company’s earnings call last week.
RBN Energy LLC analyst Housley Carr echoed that thinking and emphasized the consistent importance of Mexican demand along with LNG as key factors in price bulls’ playbook.
“With all the talk about U.S. LNG exports and plans for more LNG export capacity, it can be easy to forget that more than 6 Bcf/d of U.S. natural gas” — mostly from the Permian Basin and the Eagle Ford Shale — “is being piped to Mexico. That’s more than three times the volumes that were being piped south of the border 10 years ago, a tripling made possible by the buildout of new pipelines from the Agua Dulce and Waha hubs to the Rio Grande and, from there, new pipes within Mexico.
“And where is all that gas headed? Mostly to new gas-fired power plants and industrial facilities,” as well as “a handful of new LNG export terminals being planned on that side of the border” that “will only add to the demand,” Carr added.
Infrastructure Needs
At the same time, infrastructure in the Lower 48 is playing catch-up.
Takeaway capacity out of the prolific Permian Basin, for example, got a boost with KMI’s 550 MMcf/d expansion of its Permian Highway Pipeline, which entered service in December. That project, combined with Whistler Pipeline LLC’s recently completed 500 MMcf/d expansion and the pending 2.5 Bcf/d Matterhorn Express Pipeline, mean the basin doesn’t urgently need more, though it likely will this decade, as KMI’s Dang noted.
What’s more, pending completion of the long-awaited Mountain Valley Pipeline (MVP), expected in the first half of 2024, will bolster the flow of gas in the Northeast.
But, as Wood Mackenzie’s Daniel Myers noted, projects such as Matterhorn and MVP are not yet over the finish line. Any delays to MVP – which is now slated for service this year after multiple setbacks -- could raise fresh concern about the industry’s ability to serve the heavily populated East.
Any issues with takeaway capacity in the Permian, meanwhile, could not only have implications for LNG facilities but also the Southwest and California, which rely on gas from the basin.
Prices in Southern California, for example, spiked multiple times in 2023 when there were supply interruptions within the Permian. At the same time, when this happened, a glut of gas formed in West Texas and suppressed prices at the benchmark Waha hub.
Meanwhile, there is of course the potential for another scorching summer. The summer of 2022 proved one of the hottest on record in the Lower 48 and, while the cooling season last year was less severe, it was still above average over swaths of the country.
Against that backdrop, Myers said, demand from the power sector is running strong and is expected to continue to do so.
In each of the last two years, natural gas generation reached new all-time highs and remained the lead source of dispatchable power generation in North America, according to Wood Mackenzie. It expects robust demand again in 2024.
“Even as coal stockpiles have rebuilt to very high levels over the past year, low natural gas prices have incentivized continued high, economic coal-to-gas switching,” said Myers. “Although renewables’ accelerated adoption should prevent yet another power demand record, absent particularly extreme heat, natural gas will maintain its share as the leading source of power generation in North America next year.”
