Strong natural gas production growth and three consecutive abnormally warm US winters have driven excessive growth in inventories and natural gas storage. Natural gas futures price thus reached a 25-year low in March of $1.6. But natural gas fundamentals are shifting rapidly, according to the Speaker.

The number of active natural gas rigs have fallen 54 percent in the last year to the lowest level since 2016. Production is starting to decline now that low prices have diminished the economic incentive for producers to drill new natural gas wells. Even the lowest cost Appalachian producers have cut production and said that no new supply is likely next year at current prices.

The stark decline in the oil rig count in recent weeks has reduced the possibility of storage overflow this year, with less associated gas production. More than 12 percent of US gas production is a byproduct of oil drilling. Recent storage builds have been close to normal year-over-year, despite massive Covid-19 related demand hit.

As industrial and commercial demand starts to return to normal, the Speaker believes that demand will be met with lower supply, which will quickly burn through the excess storage, leading to shortages by March next year. Americans use 50 percent more gas today than a decade ago, driven by coal-to-gas switching.

Normal inventory levels for March end of season are 1.6 Tcf. Genscape, an energy consultant, forecasts inventory levels to fall to 0.6 Tcf next year. Even flat year-over-year production in 2020 would lead to a tight market in 2021. Natural gas futures prices in 2021/22 are already rallying but have much further to go. The Speaker expects the natural gas price to double by the end of the year. “If we get a cold winter, gas prices could go nuts.”

He is long Antero Resources (AR), which is up 400% from the March lows. The stock is still down 83 percent over the past two years. Most natural gas producers have fallen more than 90 percent over the past decade as they destroyed capital by drilling excessively.

Source: Genscape


Photo: Shutterstock