Key Drivers

1. The natural gas storage surplus has dropped by about 50% since August
2. Current U.S natural gas production levels have dropped to 2018 levels
3. Flat oil prices expected through 2021 will keep new oil and gas drilling minimal
4. LNG exports have increased nearly every week matching or beating all time export numbers
5. Recent earnings calls from Gulf and Appalachian producers place importance on paying down debt and dividends and not new exploration
6. NYMEX has surged more than $80/MMBTU since summer.
7. The rolling 12 month NYMEX strip is currently $3.126 versus the 5 year average of $2.97 after being lower since Spring 2019
8. Canadian production into U.S up 32% As Canadian storage is full and U.S. production declines

Commentary

When looking at the past 9 years, the year 2020 has had the lowest 12 month NYMEX average. The 2021 NYMEX 12 month average is trading nearly 50% higher.  The NYMEX 12-month strip has surged more than +$0.80 cents since the summer and continues to find support from increased LNG send-outs, declining production and now colder weather; the strip has been above the five-year average recently after being significantly lower since Spring 2019.

The driving force of higher 2021 prices is the trading fear that demand for natural gas this winter, next summer and the winter of 2021/2022 will exceed natural gas supply.  This is due in large part to the high percentage drop in new natural gas drilling. The past couple of years we saw U.S. natural gas production  grow mostly as the result of high oil prices and the Shale drilling explosion. The two biggest drivers of the growing demand has been Liquefied Natural Gas (LNG) exports to markets around the world and the growing use of natural gas in electric generation. COVID 19 caused a drop in oil demand and therefore oil prices dropped to around $40/bl.  New oil and natural gas production in the U.S. was drastically cut as investors weren’t attracted to the ROI.  However, the high natural gas demand that developed during the natural gas production boom didn’t disappear.  There’s a big concern that the natural gas demand versus the natural gas supply gap will widen this winter and next summer pushing prices up to levels we have not seen in a decade.

The next big question will be whether natural gas storage in the U.S. will fill next summer at a normal pace prior to the 2021/2022 winter?  If the gap between natural gas demand and natural gas supply widens over the next 12 – 18 months, prices will continue to climb higher.  Warm winters, cool summers, higher Canadian natural gas imports and higher oil prices could in any combination slow the price surge.  On the reverse angle, cold winter weather, declining production levels, high power burns and LNG exports will all play roles this winter in either reducing the storage deficit further or maintaining a surplus. This will be the key driver of NYMEX pricing over the next 18 months.

Paying off producer debt and keeping stock prices up with high dividend payments is the primary focus for natural gas producers in the U.S. versus new drilling.  This internal focus by Gulf and Appalachian producers could really be a catalyst to long-term production declines and higher natural gas prices.