This post by Jeff Bolyard, Principal, Energy Supply Advisory, is featured in our upcoming November 2022 Monthly Monitor, which includes articles and analysis for the natural gas, electric, crude oil, and sustainability markets. To sign up for the Monthly Monitor distribution list, click here.
The month of October proved to be a memorable one, with the NYMEX Winter strip (Nov ’22 – Mar ’23) continuing its drop from a high of $9.35 on August 22, to the November contract coming to a final settle of $6.868, while the remaining winter (Dec-Mar) fell to its current average of $6.15 (intraday on 11/2).
One of the main drivers of this multi-dollar drop just before winter has been the recent growth of natural gas production, as highlighted last month in this writeup when domestic natural gas production – for the first time ever – averaged over 100 Bcf/day for a 30-day period.
I wanted to follow up on that with an update on what production has done since, and some factors that could either keep prices in the realm of reasonable or proceed to the highs of a couple of months ago.
The chart below shows domestic natural gas production in 2022. Except for a blip in early February when extreme cold weather froze off ~5-10 Bcf/day for about a week, production has slowly increased, hitting yet another record in October of 101.23 Bcf/day.
In October, power demand was also down, as is typical for this time of year, while natural gas power generation declined as well. Somewhat interesting was the fact that while gas prices dropped significantly, gas-fired generation was lower in October ’22 (29.8 Bcf/d) vs. October ’21 (31.0 Bcf/d) – just the second occurrence this year.
Also benefiting from the record supply has been the refill of domestic storage, which set a record recently with five consecutive weekly injections of more than 100 Bcf, totaling 571 Bcf over the periods from Sep 9 – Oct 14. This was the largest 5-week injection recorded since May/June 2003.
Can we expect to see this growth continue going forward, keeping prices down in the $5.00-$6.00/MMBtu range? In my opinion, several things need to line up for that to become the norm:
- Drilling rig counts must continue to increase. The curve has flattened from its two-year rise and has been bouncing around between 756 and 770 rigs for the past three months. The majority of gas-focused rig growth has been in the Haynesville shale. Not a coincidence that this play sits within the states of Louisiana and Texas and will have easy access to growing LNG export demand in the Gulf.
- Drilled but UnCompleted (DUC) well inventory needs to increase as well. The DUC inventory loss over the past 24 months has left little available to tap into quickly to serve growing demand. Seven of the eight major shale production regions have reduced their DUC inventory by 1,344 wells over the past year, tapping into them in order to facilitate growth. The only one that has shown an increase in DUCs? The Haynesville, which is at +86 over that period.
- Permitting reform for both power and natural gas infrastructure would help connect markets that are getting desperate for energy with regions of supply that have few options available to get to demand.
- Producer confidence that any major investment they might make will have a runway long enough to recover the risk of the investment at a price that can be profitable over that period. Both natural gas and crude oil futures continue to be backwardated (future pricing is lower than current).
- Finally – the political winds of energy policy are constantly changing direction, giving no comfort to any fuel or technology that regulations, rules, and taxes won’t change with the next election cycle. With that said, I hope you voted on November 8 to let your voice be heard.
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