Evaluating Predicted Stair Stepped Natural Gas Spot Prices and More (2024)

Natural gas (NG) (NG1:COM) prices climbed from its ultra-scary lows over the past few months, reaching into the mid-to-high $2s. Most recently, the price dropped under $2.5. Summer, near record heat, in parts of the nation, helped push the spot price higher. We continue writing on NG with our last writing, Natural Gas' Hidden Future Of Muted Rising Prices, highlighting the existence of spare capacity, wells drilled, once in use, now idled during the recent production glut. We predicted prices would follow a stair step approach in their return to higher values for the next few years. Guessing the actual height of each stair is and was a dubious task with many unknowns. Like the extreme difficulty and care that a lady in 5" heels must use in safely negotiating steep stairs, our endeavor for calculating precise values requires care coupled with luck. So, with all the difficulties, how close was our precision and what does it mean? Let's go find out.

Our Last Estimates & Theory

Stated above, our last article outlined a price recovery pattern summarized in the next quote.

"Prices, stated above, will be higher in the later portion of 2024, in our view, into the mid $2 region. After 2024, prices will continue at least into the $3+ range with new LNG capacity coming on-line and production increased to balance the markets. What we don't yet see coming is a return to $5 or $10 pricing. It might occur, but at this point, not so likely."

A graph showing the spot price of NG from Yahoo Finance follows:

Within the fuzzy elements of estimating obtuse entities, the graph reflects a confirmation of our predicted pattern. After falling into the mid-$1 range, the price recovered toward $3, followed by a drop into the mid-to-low $2, our targeted region. The most recent price approximates $2.4.

Natural Gas Balance

A review of the natural gas balance adds investment understanding. Again, from the EIA, we added the natural gas storage graph, which most easily shows the current status of the balance.

Purposeful production softness brought the balance into check, but hasn't yet returned storage to the five-year average (heavy dark line).

Continuing with a self-created table summarizing a few important parameters, we find that producers cut approximately 6%.

From the above graph, the five-year average gap closed ever so slightly, but, also, during June, production increased by almost 3%. The spot price chart shows the effect of the cut, with the price falling almost $0.50. Price changes are really sensitive.

Marketplace

Next, a review of the marketplace seems in order. From Natural Gas Producers Are Ready To Pounce When Prices Rebound at Oilprice comes this summary,

"Natural gas is currently pricing at or below costs of production,” an executive at an exploration and production company said in comments in the quarterly Dallas Fed Energy Survey released this week."

Apparently, even with incremental production underwater, the dollar plus increase was enough to trigger a significant increase.

Chesapeake Energy (CHK) is an example of one with the abilities to increase on short notice with at least 80 wells ready. Producers now view non-producing drilled wells as reservoirs, an interesting approach.

LNG issues, in particular with the Federal Government's pause on permitting new facilities, reached a first milestone when a Federal Judge in Louisiana ruled the pause unconstitutional:

"[Judge] Cain . . . said the states were likely to succeed in showing the pause contravened the Natural Gas Act and was arbitrary, capricious, and unconstitutional. [and] were "above and beyond its scope of authority.""

Continuing with the marketplace analysis, a good summary reported in March by Dave Messler of Oilprice includes:

• Drillers are facing a challenging market with historic low prices and oversupply, partly due to El Niño and delayed LNG demand.
• Chesapeake Energy and other major gas producers are reducing new gas capex by up to 20%, deferring new well production to manage costs and prepare for future demand.
• The industry anticipates a shift from the current surplus to a potential deficit around 2025-2028, driven by new LNG facilities and increased industrial and power generation demand, offering hope for price recovery and sector growth. “

With prices at ultra-low values, major producers announced major capital cuts at their 2023 year-end reports. Some announcements included cuts up to 20% year-over-year.

Production Returning

We noted above that with price increases, production resumed. EQT Corp. (EQT), the largest producer, notified the market in mid-June that plans to add back the 1 Bcf/d curtailed in February were in place. Obviously, others increased production as well.

Now The Future

Heading back to David Messler, he notes the delicate balance between price and production must be managed. Between now and 2028, approximately 12 BCF/D of increased demand is likely to develop, mostly in the form of LNG exports. The deficit marketplace seems once again just-around-the-corner.

Until then, a recent survey estimated an average gas price of $2.59 at the end of 2024, certainly a price supportive of our step view. This stark increase from the approximately $1.50 average in March bodes better for marginal producers. They predict $3.0+ in 2025 followed by long-term prices in the $4 range. In our view, the $4 long-term average value is low. Much of the production, especially in the Haynesville region, remains marginally profitable at $4. We expect something closer to $5+.

Risk

With risk always present, the primary one remains for marginal producers to remain solvent until 2025 or beyond. It is a delicate balance. Just look above at the significant price change with a 3% production change. And then for investors, they must ask, will new demand really hit? There is political risk with this as well. Notice the deference for business support in exporting NG under the current administration. Yet, the marketplace at a predictable level is intact. We rate NG a short-term hold and a long-term strong buy. And might we add that in every trading entity, a natural price wave oscillates, creating buying and sell points for short-term traders. Perhaps the best time to buy will be in early fall. We suspect that continued weakness through early October persists. Walking the price up the stairs in heels is truly a delicate task, but at the top it will be worth the time and effort. Higher prices, like tall high heels, seem certain.

I have been an investor for several decades enduring the 87 crash, 2000 crash, and 08 crash. I do use trading systems developed with TradeStation. I have enjoyed the rewards from both buy and hold and trading. My professional experiences includes several decades as a process control engineer. I hold a JD from an eastern law school.