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There is so much natural gas in west Texas that prices in March turned negative. Elsewhere in the US, a combination of warm winter weather and surging production from gas wells has filled up gas storage well above long-term averages.
The good news is that, historically, very high storage levels have offered a contrarian buy signal. Sharp increases in US gas supply were followed by rebounds in prices in 2012, 2016 and 2020. This could be another one of those times.
As of late March, about 2.3tn cubic feet of gas had been stored, usually in empty underground reservoirs. That is about 40 per cent above the 10-year average. With spring approaching in the US, demand tends to disappear. But even adjusting for this on a seasonal chart, supply has only been as high as this in March once in the past decade.
Three regions produce 61 per cent of the country’s natural gas: Appalachia, the Permian and the Haynesville (mostly east Texas and Louisiana). Together they accounted for almost all of the 4 per cent increase to a record high output last year, according to the US Energy Information Administration. More production, coupled with one of the warmest December to February periods since the 1950s, has precipitated a sharp drop in benchmark Henry Hub prices. These fell below $1.60 per million British thermal units (Btu) in February. That put gas at the bottom of a three decade range.
Traders have priced in a fair bit of bearishness. The commodity’s price has recently rebounded slightly from record lows. What is striking is that shares in US-listed gas-focused exploration and production companies have performed surprisingly well year to date. Lex’s price index of the top nine gas producing E&Ps is up 16 per cent since the end of January.
Producers such as CNX Resources, Range Resources and Gulfport may too have benefited from timely gas price hedging. By September last year, all three had covered more than half of their respective 2024 production at prices above $3/mn Btu, according to S&P Global Market Intelligence. Their stock prices are all up this year. In fact, within exploration and production companies only EQT has declined, partly because the market did not like its $35bn acquisition of pipeline network Equitrans.
The equity market may be sending a signal that the worst has passed for natural gas. There could be more to come for investors in E&Ps too.
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