This post by Jeff Bolyard, Principal, Energy Supply Advisory, is featured in our recently released October 2022 Monthly Monitor, which includes articles and analysis for the natural gas, electric, crude oil, and sustainability markets. To read the full newsletter, click here. To sign up for the Monthly Monitor distribution list, click here.
Over the past month, domestic U.S. natural gas production has risen to record levels. Insiders watching the overall gas drilling rig counts increase to a five and a half year high—along with the uncompleted natural gas wells finally flatten from their 26-month decline that tapped into 4,500+ previously-drilled wells – might have anticipated this scenario.
Over the past 30 days, domestic gas production has averaged 100.14 Bcf/day – the first time ever that a rolling one-month period averaged over the “century mark” in production.
The chart below shows production over the past year which, since late July, has consistently exceeded the previous record set back on December 28, 2021, of 98.2 Bcf.
One impact of the record production can be seen in the recent significant drop in NYMEX forward pricing. Since 9/14, the entire winter strip (Nov-Mar) has dropped $2.25/MMBtu – a notable change in just two weeks.
So, if all-time production highs began back in late July, why did it take a month and a half to see a significant drop in the NYMEX?
As usual, we cannot look at just one input to predict impacts on pricing–we must explore the underlying reasons, which run the gamut from the hidden to the conspicuous. In fact, we only need to remind ourselves of what we already know: in July and August, record demand was more than eating up the excess production. Even with the extra gas that the accident at 2 Bcf/d Freeport LNG (Liquefied Natural Gas) export facility left captive for domestic use, demand was outpacing supply increases.
Then, thankfully, came September, when seasonal temperature declines required less power gen demand of natural gas and the weekly storage injection reached its highest of the season just last week, with fundamentals ultimately giving way to weakness in the winter forwards, which were trading at $6.64 (intraday on 9/28).
But before anyone starts selling their $8.00 hedges, keep in mind how quickly things can change in this market and why you hedged in the first place. This market is exceptionally volatile, has low liquidity, and has proven that pricing reacts quickly and in extreme ways.
For those driven by budget, view this significant drop in pricing as an opportunity to layer more insurance against adverse market conditions, as Freeport LNG will come back online, shoulder months of minimal demand will fade, and demand will increase with the arrival of winter, which will require storage withdrawals.
Unless you can anticipate when all those will happen, natural gas pricing still has more upside risk than downside potential for buyers.
Join Our Mailing List
Download our October 2022 Monthly Monitor
A newsletter that includes articles and analysis for the natural gas, electric, crude oil, and sustainability markets.Learn More