Record production, stout storage and seasonally soft weather-driven demand consistently put downward pressure on natural gas prices in 2023. Analysts expect 2024 to develop into a sequel – barring a sharp reduction in output or an exceptionally hot summer.
The January natural gas futures contract rolled off the books in the final week of 2023 after settling at $2.619/MMBtu – about $2.00 lower than a year earlier. Physical markets also struggled to find momentum. NGI’s December Bidweek National Avg., for example, came in at $3.325/MMBtu, far from the prior-year average of $8.395 amid robust supplies.
“Historically speaking, nothing shapes short-term prices more than gas in storage, and the U.S. certainly has plenty of gas in the ground right now,” said NGI’s Patrick Rau, director of strategy and research.
Total Lower 48 natural gas production topped 106 Bcf/d multiple times in late 2023, reaching all-time highs and routinely up more than 5 Bcf/d from year-earlier levels, according to Wood Mackenzie estimates. Output remains robust to start 2024, hovering near 106 Bcf/d at the start of this week. Strong output intersected with a mild autumn and a benign start to winter, leaving supplies in storage well above historical norms.
The U.S. Energy Information Administration (EIA) most recently reported an 87 Bcf draw of natural gas from storage for the week ended Dec. 22. That compared with a five-year average pull of 123 Bcf.
Total underground supplies finished the week 10% above the five-year average and, in some regions, even farther ahead of historical norms. Mountain regions stocks were 31% above the five-year average and Pacific supplies were ahead nearly 19%.
“The U.S. supplies more than 90% of its gas from domestic production” – complemented by ample Canadian imports – “and certainly has the inventory to supply 100%, if necessary,” Rau said. “No one is worried about where the U.S. will get gas in 2024.”
American producers remain active in anticipation of a wave of new LNG facilities on the Gulf Coast. The first of those facilities, however, won’t open until at least late 2024 and the big boost to demand likely won’t arrive until the following year. Export levels are strong in the meantime, but the record production is exceeding demand overall.
Some analysts for months have said low prices would galvanize producers to scale back. Prices this year could get a lift if that happens. DBRS Morningstar, for example, said it expects supply/demand to gradually tighten in the year ahead as new production tapers. The firm expects Henry Hub front-month futures to average around $3.50 in 2024.
Several other analyst firms, though, including Goldman Sachs Group Inc. and Tudor, Pickering, Holt & Co., expect prices to average below $3.00 this year.
“We believe balances remain oversupplied heading into 2024,” Goldman analyst Samantha Dart said. Barring a sudden shift in winter conditions or lofty temperatures beginning in the spring, “we expect that current forward prices would put storage on a path to congestion by the end of next summer.”
While Morningstar’s Andrew O’Conor, vice president, sees a price “recovery,” he concedes 2024 could get off to a sluggish start. “Collectively, an ample stockpile of natural gas, reduced demand caused by expectations for warmer-than-normal winter temperatures and strong production are likely to weigh on gas pricing in the near term,” he said.
The LNG Factor
What’s more, any sustained price momentum largely hinges on lower output in the months ahead. Given global demand expectations and the coming U.S. liquefied natural gas expansion, many producers are reluctant to slow down substantially. Production momentum, as veteran gas broker and independent analyst Steve Blair told NGI, takes time to gather because of staffing and equipment needs.
Producers may choose to live with low prices this year to ensure they are ready to meet a surge in demand in 2025 and beyond, Blair said. 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 EIA.
“We may not need it now, but there is a whole next level of demand coming,” Blair said.
Rau noted that European demand, elevated over the past two years after Russia cut off most of its gas pipeline routes to the continent, is expected to remain high. The United States and European Unions levied sanctions against Russia to penalize it for invading Ukraine – and the Kremlin used its energy complex, particularly gas supplies, to retaliate. This leaves Europe largely dependent on imports of LNG.
At the same time, major Asian markets, including China, are forecast to increasingly call for the super-chilled fuel as they use gas to displace coal.
“We expect some producers will increase drilling in the second half of 2024 ahead of new Gulf Coast LNG export capacity coming online,” Rau said. “Publicly traded natural gas producers by and large have not announced their capital expenditure plans for 2024 just yet, and that won't start happening in earnest until mid-January. We fully expect them to remain in ‘maintenance mode,’ which we define as annual growth between 0-5%. Wall Street consensus is roughly 4% production growth for 2024, but that could certainly come down.”
Weather Twist?
Weather is always a potential wildcard.
“So far,” however, “the winter in the Lower 48 has been warmer than normal, and while predicting how the rest of winter will go is always an imperfect science, we believe the general consensus is that the rest of winter will be on the warmer side as well,” Rau said.
In fact, natural gas price bears have an El Niño weather pattern this winter in their favor. When such patterns develop, they often pave a path for relatively mild winter temperatures and lower levels of snow in the Rockies, Northern Plains, Midwest and Great Lakes – major gas-consuming regions.
Meteorologist Matt Rosencrans of the U.S. Climate Prediction Center said during a call with reporters late last month that, a few cold snaps aside, mild weather was likely to persist through the rest of this winter.
Meanwhile, as producers in dry gas-rich areas forged ahead in anticipation of long-term demand for LNG, Permian Basin associated gas supplies are solid in part because of ongoing strength in oil production in the prolific region. Continually advancing technology and production efficiency improvements bolster volumes as well.
U.S. oil production reached all-time highs in 2023, according to EIA, and associated gas output in the Permian did as well.
“Activity in the Permian shows no signs of slowing,” Samco Capital Markets’ Jacob Thompson, managing director, told NGI.
He said oil producers in the Permian have ramped up to meet global demand and fill a void left by OPEC output cuts in 2023. “American oil and gas production is on a tear,” Thompson said.
In the near term, though, this could result in another year of excess domestic gas supply and weak prices – again, that is, in the absence of extreme weather.
StoneX Financial Inc.’s Thomas Saal, senior vice president of energy, said the early onset of a sizzling hot summer in the Lower 48 and overseas could upend supply/demand balances and send prices in a new direction. So, too, could new geopolitical strife along the lines of Russia’s war in Ukraine.
“Weather is almost always king for natural gas markets,” Saal told NGI. “But another war that disrupts global supplies – we’ve seen that’s the kind of thing that can have a big impact.”
