The collapse in natural-gas prices in recent months has generated a fraction of the attention of the run-up of the first half of 2022. But it could dent 2023 profits industrywide—and dampen inflation by reducing heating and electricity costs this year.
Natural gas traded on Friday at $2.90 per million British thermal units, down 8% on the week and at its lowest level since 2021. Gas has fallen 35% this year, and 70% from an August peak of nearly $10.
So much for the bull case of a year ago that was keyed off rising global demand for U.S. liquefied natural gas and the critical role of gas as a substitute for coal in electricity generation worldwide.
A warm winter in the U.S. and Europe, as well as rising domestic production, are to blame. Temperatures in New York City, for instance, have averaged about 10 degrees above normal in January.
Gas production, meanwhile, is up 5% year over year. J.P. Morgan analyst Arun Jayaram sees the market flipping from an undersupply of 1.5 billion cubic feet a day in 2022 to an oversupply of 2.0 billion in 2023, he wrote on Friday. U.S. production is about 100 billion cubic feet a day.
Gas storage levels could end October, the start of the winter heating season, at record levels, and production cuts may be needed to balance the market, Jayaram wrote.
Supply and demand will probably come into balance over the next 18 months, Matt Portillo, an analyst at Tudor Pickering Holt, told Barron’s. “By the time we get to 2025, we think the market starts to look quite tight,” he said.
The major gas stocks, including
EQT
(ticker: EQT) and
Chesapeake Energy
(CHK), have held up better than the commodity this year. EQT, at about $33, is off 3%, and Chesapeake, at $88, is down 7%.
“While we remain bearish natural gas in the near term, Chesapeake remains our favorite stock among the gas-levered E&Ps, given the strength of its cash-return program,” Jayaram wrote recently. Like others in the industry, Chesapeake has a profit-linked payout…
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