Natural Gas: Bull Case Is Gaining Momentum

The Bull Case for Natural Gas in Building Steam

Slowly but surely, prices are finding their feet. Not only have front-month futures rallied ~50% since bottoming out in February, but the bullish backdrop for natural gas prices over the coming 12-18 months continues to move in the right direction. This should be very supportive of prices as we exit 2024 and enter 2025.

Since mid-2022, the US natural gas market has faced continued bearish weather and robust production growth to such an extent the market exited the 2023/24 withdrawal season with storage levels around 650 bcf above seasonal averages. Prices dropped accordingly. As key spot benchmarks fell to lows around the $1.5-$1.6 MMbtu area, producers finally responded by cutting production in early March.

As we can see below, production peaked at around 106 bcf/d earlier this year and has since fallen to around 96 bcf/d.

Producers have shown exceptional discipline thus far in 2024 (albeit with the help of pipeline maintenance marginally impacting supply). And, with domestic demand returning to normal levels following the seasonally warm US winter, this drop in production has allowed total natural gas supply (production less net exports) to return to far more robust levels.

This has materially tightened the market and pushed prices higher.

We are also seeing storage changes move in the right direction. Aside from the brief cold blast in early January, the past couple of quarters has seen very bearish inventory changes. This looks to be slowly rectifying itself as witnessed by bullish inventory changes over the past couple of months, as we can see below. Greater-than-normal inventory draws and/or smaller-than-normal inventory builds are generally a prerequisite for higher prices.

Although the natural gas supply picture has improved dramatically, it is important to remember total supplies are only back to average levels while overall inventory balances remain in a glut. There is still plenty of work to be done for bulls. Fortunately, there are demand catalysts that should support higher prices over the coming 12-24 months, but this will be a slow process and there is still plenty of excess storage to be worked through, capping any shorter-term gains we are likely to see.

Total storage levels still remain ~600 bcf above seasonal norms. What’s more, my naive supply and demand model suggests if production were to average around 98-99 bcf/d from now until the end of injection season, storage levels will still be slightly above seasonal averages come withdrawal season. This of course depends on the weather from now until then (which has every change of being bullish), along with other factors such as the willingness of producers to bring back production.

The bullish take on these recent developments is how the supply situation has improved dramatically even with falling LNG exports thus far in 2024. We will see LNG exports rise again as there is ample demand globally for LNG and much of the recent drop in exports is a result of issues at the Freeport export facility. After all, one of the primary tailwinds for natural gas prices over the coming 18 months is the looming rise in LNG exports, with capacity set to increase by around 6 bcf/d through the end of 2025. This additional LNG export capacity should begin to come online as we approach the latter stages of 2024.

With the additional potential for US production growth to surprise to the downside over the coming 18 months, these dynamics are the backbone of the bull case for natural gas. It has ultimately been the bearish weather that has held prices back. But as we have seen, we are slowly working through the excess supplies that have built up over the past year.

For bulls, the weather dynamic does appear to be turning more favorable over the medium term. Weather is always the wild card when it comes to natural gas. But, as we can see below, the US looks set for a seasonably warm summer. At the very least, this should see weather-related demand…