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U.S. Natural Gas Prices Are Set For A Sustained Rally

Record LNG exports and unseasonably high demand for electricity have combined in recent weeks to push U.S. gas prices considerably higher than they normally are at this time of the year. And this may only be the beginning.

Gas prices have jumped twofold since the start of the year; that could increase another 25 percent if the summer turns out hotter than normal, CNBC reported last week. The report cited a senior analyst from S&P Global Community Insights who noted that natural gas production was not rising fast enough to meet growing demand, which was bound to push prices even higher. 

“Asian and European natural gas prices stand at $35 per mmbtu, versus $8.20 per mmbtu here in the United States. Given the underlying fundamentals that have now developed in US gas markets, we believe prices are about to surge and converge with international prices within the next six months,” natural resources investment firm Goehring & Rozencwajg wrote in its latest quarterly market commentary.

The report details the evolution of the current energy crunch in Europe and how it pushed prices to the current historic heights, beginning with the colder than usual end of winter last year, which pushed up demand, leaving inventories lower than normal because Russia was not pumping additional gas on top of its contracted volumes.

Over the months that followed, things worsened as demand for natural gas, especially LNG, remained strong in Asia, too. By the start of the new heating season in Europe, the natural gas fundamentals were extremely bullish and unleashed the price rally that pushed natural gas to prices equivalent to $300 per barrel of oil. And all that, as Leigh Goehring and Adam Rozencwajg note in their report, happened before Russia invaded Ukraine.

Meanwhile, the U.S. has been enjoying a stable supply of natural gas and higher LNG exports—so much so that plans are in place to build additional LNG export capacity to satisfy a thirsty Europe that is trying to wean itself off Russian gas—if it can.

“Almost everyone takes it for granted that US gas production will continue to grow strongly as we progress through this decade,” Goehring and Rozencwajg wrote. “With production having nearly doubled in the last 10 years, few analysts bother to even consider underlying shale gas supply issues. But something else has happened that receives no comment – never before has production been concentrated in so few fields.”

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The authors of the report then proceeded to explain that just two shale plays—the Marcellus shale and the Haynesville shale—account for as much as 40 percent of total U.S. natural gas production. Associated gas from the Permian brings in another 12 percent of the total. And production will not grow forever because it never does. The question, according to the report, is when production will begin to decline, the way it did in the Barnett shale and in Fayetteville.

“We’ll be topping $10 for sure. I would put $12 to $14 as the upper band,” John Kilduff, partner of Again Capital, told CNBC last week. “This is a commodity that trades parabolically a lot. It’s no stranger to parabolic moves up and down. It’s incredibly volatile, and it also has the ability to reset. We could get to $10 or $12 and if you have a cool August, then you could be down below $8 again.”

Kilduff seems to refer to current demand patterns as compared with supply. According to Goehring and Rozencwajg, the price of U.S. gas could shoot up considerably the moment “the US gas market swings from even marginal surplus to marginal deficit.” The question of production trends in the U.S. gas shale patch, then, becomes all the more pressing.

According to Goehring and Rozencwajg’s analysis based on production patterns from the Barnett and Fayetteville shale plays, Marcellus could be close to peaking and plateauing before production begins to decline—production there could reach a plateau within the next 12 months. This would be bad news because, after the plateau, shale gas plays seem to go straight into a sharp production decline. That sharp decline could begin in 2025.

The situation is not much different for the Haynesville shale play, although production growth patterns there have been less linear than those in the Marcellus. Even so, the authors expect gas production there to reach a plateau by October 2023. 

In other words, within the next year or so, shale plays that account for 40 percent of U.S. gas production may well reach the peak of production rates and soon after begin declining. Demand for LNG, meanwhile, is very likely to remain as strong as it is now, if not stronger—after all, the EU is in a mad rush to reduce all imports from Russia. The current gas price rise in the U.S., then, may also be only the beginning of a sustained price rally.

By Irina Slav for Oilprice.com

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Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More