- 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.
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.
For readers that have found our natural gas articles insightful, we think you should give HFI Research Natural Gas a try. We provide the following to subscribers:
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