The Daley Note: February 7, 2023
Sub-$2.00 natural gas prices are now clearly in view, and there may not be a lot the market can do to prevent them.
Natural gas prices have already fallen by 65% this winter. The March front-month Henry Hub contract is trading below $2.50/MMBtu as of Monday (Feb. 6), and futures are under $3.00 through the first half of 2023.
But the price cuts aren’t deep enough, according to East Daley’s latest Macro Supply and Demand Forecast. We see the need for a “shock to the system” to slow production growth. Even with lower gas-directed drilling and lingering constraints on Permian pipeline takeaway, it may take a price shock to force producers to choke back wells and defer completions.
To be sure, not all the news is bad for bulls in 2023. Freeport LNG should come back online this quarter, returning ~2 Bcf/d of LNG export demand, and another hot summer could boost power consumption near last year’s historical highs. But we see these events as temporary signals to the market that could have negative repercussions if they incentivize more drilling.
Which leaves the question, how do we realign production growth? In EDA’s view, it will take a dramatic response from producers, mainly in the Haynesville and Marcellus, to curb growth.
In the Jan. 28 issue of The Daley Note, we present the case for 5 Bcf/d of unconstrained gas production growth in 2023. At this pace of supply growth, storage would build rapidly and exceed the 4.0 Tcf upper limit on inventories before next winter.
We cite two drivers of supply growth: the Permian and Haynesville. In the Permian, most growth will not arrive until late in the year when expansions to MPLX’s Whistler Pipeline (500 MMcf/d) and Kinder Morgan’s (KMI) Permian Highway (550 MMcf/d) are schedule to begin service. Absent a drastic drop in crude oil prices, we do not expect the Permian to pull back. Thus, gas production must stop growing elsewhere to balance the market.
In our latest monthly Macro Supply and Demand Forecast report, East Daley provides clients with two scenarios: an unbalanced forecast showing the severity of the natural gas supply problem, and a “forced balance” scenario that avoids oversupply in 2023.
The figure shows how these scenarios contrast in the Haynesville (ArkLaTex), to pick one basin. The solid area shows the unbalanced forecast where drilling activity, primarily from Aethon, Comstock Resources (CRK) and Southwestern Energy (SWN), drives over 1.5 Bcf/d of supply growth.
The conundrum in the Haynesville is that the rigs are already in place to create this new growth. Therefore, to lower near-term production towards the balanced market (blue line), we reduce activity by 19 rigs Y-O-Y. We also build an inventory of 350 drilled but uncompleted wells (DUCs) by year-end 2023 to defer the start of new production.
The natural gas story is a nuanced one, as we lay out in 2023 Dirty Little Secrets. In the long term, a massive ramp in LNG demand will require a boost in production from the ArkLaTex, as shown in the figure. This dynamic presents significant opportunities for upstream investment and infrastructure growth across the US.
Of course, it won’t just be in the ArkLaTex where market forces reshape the supply curve. To reach a ‘balanced’ market will require contributions from many basins. We will further explore these dynamics in our latest market update for clients, “Dirty Little Secrets: After Hours – The Natural Gas Undoing Project,” scheduled on Thursday, Feb. 23. Sign up to attend this webinar. – Justin Carlson Tickers: CRK, KMI, MPLX, SWN.
Dirty Little Secrets: After Hours – The Natural Gas Undoing Project
East Daley will host a webinar on Thursday, Feb. 23 at 1 PM EST to look deeper into the natural gas story. In “Dirty Little Secrets: After Hours – The Natural Gas Undoing Project,” East Daley explores the short- and long-term supply and demand factors driving natural gas prices. Are market risks being accurately priced in the forward curve? East Daley explores the short- and long-term dynamics driving the natural gas market. Sign up to attend our latest webinar.
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