Natural Gas Producers Will Receive The Biggest Benefit From The Latest Oil Market Craze

Summary

• The near-term oil price war will benefit the natural gas market as US oil production will exhibit a drastic decline in Q2 2020.
• In our base-case scenario at the moment, we assume WTI rises back above $50/bbl in H2 2020.
• In this scenario, we have US natural gas production declining y-o-y by 1.3 Bcf/d y-o-y.
• Given the balancing point for the US natural gas market is at ~94.5 Bcf/d today, this implies a fundamental supply-demand deficit of 6.5 Bcf/d.
• Readers can take advantage of the current sell-off by either scaling into a natural gas long outright (UGAZ) or natural gas producers. We are playing this via a long UGAZ position. We added this morning and plan to hold this long into the summer if needed.
• Looking for a helping hand in the market? Members of HFI Research Natural Gas get exclusive ideas and guidance to navigate any climate. Get started today »

Welcome to the market craze edition of Natural Gas Daily!

The near-term oil price war will benefit the natural gas market as US oil production will exhibit a drastic decline in Q2 2020. With associated gas production ballooning throughout 2018 and into 2019, the US natural gas market became overwhelmed by the surging supplies pushing prices down to $1.7/MMBtu.

Since 2016, associated gas production has ballooned from 25.44 Bcf/d to 37.802 Bcf/d in 2019.

In 2019, Lower 48 gas production averaged 91.41 Bcf/d, which means that associated gas production accounted for 41.35% of total gas production.

In our base-case scenario at the moment, we assume WTI rises back above $50/bbl in H2 2020. This would echo a production decline in US oil production from 12.78 mb/d at the end of 2019 to 11.775 mb/d to the end of 2020.

In this scenario, we have US natural gas production declining year-over-year by 1.3 Bcf/d year-over-year.

Source: EIA, HFI Research

But keep in mind that because lower 48 gas production averaged ~91.41 Bcf/d in 2019, that implies the 2020 average to be ~90.1 Bcf/d.

With lower 48 gas production at 93.9 Bcf/d today, this implies a y-o-y decline to ~88 Bcf/d by the end of the year.

Most of the decline will actually be from Appalachia with a drop of ~2 Bcf/d. Associated gas production might actually be flat under this scenario.

But the supply-demand implications with lower 48 gas production at ~88 Bcf/d is unthinkable.

Given the balancing point for the US natural gas market is at ~94.5 Bcf/d today, this implies a fundamental supply-demand deficit of 6.5 Bcf/d. Something will have to give under this scenario:

• Either demand destruction is created via very high natural gas prices or...
• Supply needs to respond right away.

But given associated gas production is 41% of overall production, a supply response would not be immediate, leading to a price spike as the more likely scenario. Prices will have to match global LNG benchmarks +$3/MMBtu to start LNG shut-ins in full effect. This means prices will have to go above $5/MMBtu.

If WTI averages $35/bbl, what happens to associated gas production?

We estimate that if WTI is at $35/bbl to the end of the year, the drop in US oil production would reach 9.55 mb/d.

This would be the equivalent of a 5.239 Bcf/d drop y-o-y in natural gas production.

Taking the average of 91.41 Bcf/d, you get 86.171 Bcf/d average for 2020.

But because natural gas production today is 93.9 Bcf/d, this implies that by the end of the year, US gas production would fall to 75.55 Bcf/d.

This is largely because US shale producers will cut capex to bare minimum and let overall production decline at the base decline rate.

But the biggest difference this time vs. 2015/2016 is that because associated gas production increased 12 Bcf/d since then, the base decline for oil production per month is between 250k b/d to 300k b/d.

As a result, the acceleration in decline is exponential this time around vs. last time.

Even if you are in doubt of the ~75 Bcf/d figure we laid out, we can use practically any number below ~88 Bcf/d to get to an extremely bullish natural gas price scenario.

As a result, the natural gas market deficit is coming if oil prices remain low.

Conclusion

With associated gas production now accounting for ~41% of US natural gas production, the drop in oil will have an immediate impact on US oil production and thus associated gas production.

Our base case is for lower 48 production to fall to ~88 Bcf/d by year-end creating a market deficit of ~6.5 Bcf/d. In order to prevent a massive storage shortage, the market will have to price a complete shut-in scenario for global LNG exports. This implies a price of around ~$5/MMBtu.

Readers can take advantage of the current sell-off by either scaling into a natural gas long outright (UGAZ) or natural gas producers (Antero (AR), EQT (EQT), Range Resources (RRC), and Southwestern Energy (SWN).

We are playing this via a long UGAZ position. We added this morning and plan to hold this long into the summer if we have to.

Analyst’s Disclosure: I am/we are long UGAZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[jess perkins]

@HFIR Energy - what's going on with this Oil & Gas industry? I've seen nothing but 40 to 50 percent losses over the last year. Even with the refinery's. Is there no future in this segment with all the hype over renewable energy?

[whitehead1]

I will have more faith in higher NG price if most of the NG producers close their hedging for 2021 and book profit. I wonder AR can take advantage of their hedging position.I read somewhere that they have over billion in hedging profit. Not sure what they are waiting for.
If NG price were to go higher why keep hedges on the book and sell at lower price in the future?.

[beezwaxxxx]

No New Fracking’ – Be Careful What You Wish For
in Oil & Companies News 18/03/2020

In the Democratic debate Sunday night, former Vice President Joe Biden ended a troubling weekend for most Americans by promising that, if elected, his administration would have a “no new fracking” policy. Instead, he would focus on somehow subsidizing Alexandria Ocasio Cortez’s fantasy of an impractical and unaffordable network of high speed rail lines criss-crossing the country.

With the national economy shutting down around us due to government measures taken to inhibit the spread of the coronavirus, it is becoming obvious that most Americans will end up being asked to at least self-quarantine at home for a period of weeks. If that doesn’t work, the government could move to force the issue upon the population. Governors from both parties in Illinois, Ohio, California and New York moved to close down bars and restaurants over the weekend, and we can expect more similar and more stringent moves to control human behavior as this week goes on.

All of which means that, with average Americans spending an increased amount of time at home, the importance of maintaining a power grid that supplies plentiful and affordable energy has never been higher. Here is the problem with the plans of Biden – and Bernie Sanders, who would go even further – to ban fracking: No new fracking essentially means little to no new natural gas supplies

[Brian Cellars]

Congrats to the bears who rode DGAZ for a gain of 50% in 5 days, and more if you traded it actively. I think NG will continue lower, as Steve F also believes. I wasn't sure it would after the rally up on low oil prices, but it seems destined to hit 1.50. I sure hope HFIR and other bulls sold while they had the win after the rocket blast run from Mon. Mar.9. "Holding till summer" and riding the shares all the way back down underwater would be simply crazy.

[snowgooseflying]

I had DGAZ, and I thought that nothing moved faster than natty, however, after some gains, I've sold DGAZ, and bought JNUG at near the bottom yesterday for a 112% gain up to today. You can look it up, as JNUG had a 58% gain today, and a similar gain yesterday. Charts, they really do work.
BTW, DGAZ has some more room to run and so does JNUG.
Once gold slows down, I'll be back to trading natty.

[snowgooseflying]

Here are the trades:

03/16/2020 10:14:27 Sold 12 DGAZ @ 258.4233

3,101.01 0.00 0.07 3,262.37

03/16/2020 10:17:18 Bought 200 JNUG @ 5.37

-1,074.00 0.00 0.00 2,188.37

03/16/2020 10:23:12 Bought 350 JNUG @ 5.86

-2,051.00 0.00 0.00 137.37

03/16/2020 10:26:44 Sold 40 SVXY @ 30.855

1,234.17 0.00 0.03 1,371.54

03/16/2020 10:27:16 Bought 200 JNUG @ 6.1201

-1,224.02 0.00 0.00 147.52

03/16/2020 11:02:37 Bought 20 JNUG @ 6.25

-125.00 0.00 0.00 22.52

03/16/2020 11:19:49 Sold 18 FAZ @ 48.865

879.55 0.00 0.02 902.07

03/16/2020 11:23:13 Bought 120 JNUG @ 7.0545

-846.54 0.00 0.00 55.53

[stonkless]

bearish pennant breakout
opened short @ 1.84
stop limit in profit
might have to try again at 1.825 if it pops up for last gasp
see you at 1.4ish or something like that

[JesseC27000]

My DGAZ from last Friday is cooking well

[Steve Frechette]

Warning to long time natty traders:

Europe exiting winter with storage very full.

CV is keeping EU activity to a minimum and will be that way for months. Restoring confidence takes time.

Low natty prices will fill storage up quickly unless Russia slows piped gas which wouldn’t make sense, but is possible.

Where does US LNG go with EU storage filled by Mid July?? Watch JKM and TTF for signals. Asia still slow as indicated by JKM.

Still think natty hasn’t bottomed until we see rigs at ~80. L48 should’ve been dropped much earlier to prevent this mess. Maybe weather saves the day. Need scorching temps in Europe and North America.

CV is the nail in the coffin. Yes we’ll see less assctd gas, but it doesn’t matter if activity is dead stop in EU and off 10% in US.

Good luck to all

[Scott W 86]

All fossil fuels are under siege for the foreseeable future. Crippling all these environmental disasters economically is the way to go in order to leap into the next acceleration of wind and solar. Let's all hope Biden can dethrone the maniac in the white house and we can have a cleaner future. We went 100% solar 5 years ago and haven't looked back. My one achille's heel is the prius we drive. Let Russia, China, Saudis, and India drown in their oil and smog.

[ofgktc]

i agree if not for trumps maniac obsession for the safety of the american people by putting in travel ban with 🇨🇳...instead of listening to the knucklehead democrats who if he would have listened too virus would be out of control

[Andy92]

Rigs are being stacked now because of the low prices. The rig counts are about to plunge. I got word H&P (one of the larger rig contractors) is stacking rigs now.

[Joe China Puppet]

CHK at $0.15. Nothing to save them.

[Joe China Puppet]

Noticed some warmer weather in TX and some cooler weather in north. There you go speculators, talk among yourselves.

[Andy92]

Wednesday meeting produced no results beneficial to oil demand being cut. The price of oil is not going to $40 and above in the near term for now.

On a side note; I love how the fundamental of increased production declines started becoming more bullish and the bears came out of the woodwork.

[Steve Frechette]

AR about to break $1. Range under $2.

It’s amazing to me some of the contributors still feel empowered to comment as authorities on natty when it’s clear the industry is toast with current strip pricing through 2022.

But I guess u can throw around ridiculous price targets and no one will care in 6 months regardless of how bad the prediction turns out.

FYI SilverBow resources is circling the drain near $1. A true repeat of what happened with Swift energy. For 2+ years, the man of a thousand profile names pumped chk GPOR sbow and swn on the nat gas columns. All of the stocks would have decimated your portfolio.

Good luck to all

[JesseC27000]

Nice to see you posting, nice gain on my DGAZ from yesterday, Thank you for the warning as always

[Looking_For_Dividends]

@Steve Frechette
Thanks for posting, Steve. Do you see any safe issues in the Nat Gas sector?

[Scott W 86]

I love Cabot Oil and Gas. Best of Breed and Lowest Cost Producer. But if Shale Oil gets slammed for an extended period many of the Appalachia players will bounce back.

[atlasman]

How did you get to he consumption number of 94.5 BCF/day? Looking at EIA data I get a very different number.

[Crypto Wealth Destruction]

This is huge man. Great article. I expect pretty much the same results. Russia/Saudi probably helped buy me a house. Thank goodness I need more $$$ to dump into this market

[warrenhheller]

which ng stocks are the best buys?

[Retired_Oilman]

Carley Garner made a personal appearance on Mad Money today. She reiterated her past analysis and sticks with the prediction that nat gas is going much higher due to the historically extreme short interest, regardless of the fundamentals. Of course, Garner is a technician but her forecast dovetails with HFIR.

On crude oil, apparently the Russian refusal to cooperate with OPEC for a deal to cut production is personally backed by Putin. After that abrupt end to the OPEC meeting, I highly doubt that they will cut a deal with the Saudis but neither country can live with $30 crude oil for an extended period of time. The Russians seem to forget that the Saudis tried to shut down U.S. shale by glutting the market back in 2016. It didn't work but prices tanked and drove up storage to extreme levels. These foreigners don't seem to get that even if a U.S. company files Chapter 11, somebody will own the assets and continue to produce. And U.S. companies will produce at the highest rate possible given the restraints of the capital budget.

[Joe China Puppet]

Oil industry experience didn’t prepare anyone for this!

[pat45]

Just the short covering on nat gas will drive prices higher...inventories are extremely low and usage has been going up...with production decreasing prices will go up

[User 152469]

Inventories are above last year and the 5 yr avg They are not low.

[snowgooseflying]

Russia is but a ruse. As the largest oil producer in the world, it's all about us. Saudi Arabia knows that there is no way we can frack at $30/ barrel and make a profit.
Don't expect anything to come out of the meeting tomorrow.

[snowgooseflying]

HFIR is always an entertaining read. It's as amusing as science fiction.

[DKB2]

I always take my science fiction seriously :-)

Happy Trails...

[Peter Hoffman]

The gap will be made up by a slightly higher price and imports from Canada

[bondsmoker]

$5 NG? Really?

Going to be shocked if NG hits $3 by year-end.

[stonkless]

wouldnt be the 1st time ng shocked traders

[User 152469]

So just to be clear, a deal between Russia and OPEC (meeting tomorrow) throws out this hopium induced scenario.. oil goes to $50 in a heartbeat. Probability? 50/50 (at least)
You are assuming that producers do nothing as prices rise. When has that ever happened? Assign a probability of zero.
You are assuming that the US govt does nothing. Check the news.. probability zero.
Those are the macro errors. We have a good trade in UGAZ to $2 gas. Let's see what happens next.

[ofgktc]

yea true but was it and inside job ...russia and saudi arabia are trying to drive the 🇺🇸 shale producers out of business...saudi arabia probably still torq that we didnt do there bidding when iran atttacked there refinery

[ofgktc]

will trump step in ...he would like too but he might not in election year

[User 152469]

They are meeting tomorrow. Stay tuned.

[kenberthiaume]

So which of the leveraged plays can actually enjoy the higher prices? AR? RRC? I'd be bad to be right on gas but buy something so hopeless it goes under anyway.

You'd think less oil would mean less NGL which would help AR and RRC as well.