Higher Natural Gas Prices Could Lead Recovery of U.S. Energy Industry

Apr

08

Higher Natural Gas Prices Could Lead Recovery Of U.S. Energy Industry

7,474 views|Apr 8, 2020,06:22pm EDT

Dan Eberhart Contributor

Energy

Dan Eberhart is CEO of Canary, LLC.

It’s hard to find bright spots amid the doom and gloom in today’s oil markets. No matter what happens at the OPEC and G20 meetings later this week in terms of supply management, the oil market faces a long road back to breaking the mid $50-a-barrel range that WTI crude was trading at before the coronavirus outbreak.

But analysts and energy executives are increasingly looking to natural gas markets as a first source of relief for U.S. producers. American producers’ response to low crude prices, including shutting in uneconomic wells and slashing drilling capital budgets by 30 percent and even 50 percent, will have a dramatic effect on domestic natural gas output as well as oil. 

Roughly 40 percent of U.S. gas production is so-called “associated gas,” a byproduct of drilling for oil. That means the sharp drop in domestic crude output will result in a significant reduction in gas production, too. And many experts think this could result in a faster, sharper recovery in prices for U.S. gas compared to oil, where it could take a couple years to work off the vast inventories that are now building due to today’s unprecedented supply surplus. 

U.S. gas prices have been beset by oversupply for years. Before the coronavirus outbreak, natural gas traded at depressed levels below $2 per million British Thermal Units (MMBtu) during the heart of winter — peak demand season for the heating fuel. Concerns about the impact of coronavirus on industrial demand later took prices to the $1.50 level — a low not seen since 1995. Today, benchmark Nymex Henry Hub prices are still extremely low at around $1.80 per MMBtu.

But investors and traders are focused on the future and many see a much brighter outlook for the commodity. While U.S. independent producers have generally seen their share prices slashed by at least 50 percent in 2020, gas producers have fared much better. 

Shares of EQT, the largest gas producer in America, actually show a slight year-to-date gain. That’s impressive considering the widespread carnage the coronavirus has unleashed on the corporate world. 

What are analysts and investors expecting from U.S. gas? Oil and gas data firm Enervus expects U.S. gas production, which now registers around 95 billion cubic feet (Bcf) a day, to decline by over 6 Bcf a day by year-end. This would cause the gas market to go from being long during the summer months to being very short by the winter of 2020-2021.

Enervus expects prices to exceed $4 per MMBtu and may even reach $4.50 as early as the coming winter. Such an increase would incentivize new drilling and production growth from shale gas plays like the Marcellus, Utica and Haynesville basins. This raises the potential for the recovery in gas to lead to a broader one in the post-coronavirus energy sector. 

Investment bank Goldman Sachs GS also sees a tighter market as gas output continues to fall, even as demand starts to rebound with a slowdown in the spread of the coronavirus. “As we enter the 2020-21 winter, we expect production declines to be visible enough that gas prices will rally sharply in our view to help summer 2021 reach comfortable inventory levels,” Goldman Sachs analysts wrote in a recent report. The bank predicts natural gas prices as high as $3.50 per MMBtu by this winter.

A doubling of gas prices could be major boost for many U.S. exploration and production companies. Low commodity prices have long made gas a drag on profits. The situation got so bad in the Permian Basin that producers were forced to flare associated gas — burning it at the well-head — because no market existed for it. That unfortunate and environmentally harmful practice should be eradicated by the oil price rout — another silver lining of this harsh downturn. 

The impact that a doubling of natural gas prices could have on the health of the U.S. oil and gas industry should not be underestimated. While America’s independent producers account for 83 percent of the country’s oil production, they account for an even greater share — 90 percent — of its gas output. 

Will it completely offset the impact of low oil prices? No. But considering that independent producers provide over 4.5 million American jobs, the effect of a tighter gas market and higher prices will play an essential role as U.S. energy firms recover from the devastating economic effects of the coronavirus.