Natural-gas prices experienced a notable increase of 22% in October, effectively eliminating about half of their year-to-date decline. This surge comes as traders analyze the demand outlook for natural gas as the market enters the winter heating season.
October Performance and Current Price
Recent data shows that the front-month December natural-gas futures contract settled at $3.58 per million British thermal units on Tuesday, representing a 22-cent gain and a nearly 6.7% rise for the session. The month as a whole saw a substantial climb of 22.1%, marking the largest monthly increase since June. As a result, the year-to-date loss has been reduced to 20.1%.
Shifting Market Landscape
Pavel Molchanov, an analyst at Raymond James, suggests that the worst is behind us when it comes to natural-gas prices. He believes that it is highly unlikely for prices to return to their mid-2023 lows during the winter months.
In recent months, natural-gas prices have steadily gained momentum, with four out of the last five months yielding positive returns. It is important to note that back in late May, natural-gas futures were down by nearly 50% year to date.
Factors Influencing the Market
Gary Cunningham, Director of Market Research at Tradition Energy, explains that the early-year decline in prices was primarily driven by unseasonably mild winter weather across most of the country. This resulted in a significant surplus of natural gas in storage at the start of spring.
The situation remained unchanged until around June when Texas experienced extreme heat, causing power generation consumption of natural gas in the southwest to exceed normal levels. Furthermore, the increase in flows of natural gas into liquefied natural gas export terminals also played a role in supporting prices.
Future Outlook
Looking ahead to 2024, Molchanov suggests that the plateauing of U.S. gas supply is becoming increasingly evident. This could have implications for future market dynamics and price trends.
In conclusion, natural-gas prices have made a remarkable recovery in October, reclaiming a significant portion of their year-to-date decline. With various factors at play, including increasing demand and plateauing supply, the market is in a state of flux as traders monitor developments during the winter heating season and beyond.
The Marcellus Formation: Challenges and Growth Opportunities in the U.S. Natural Gas Industry
The Marcellus Formation, recognized by the Energy Information Administration as the largest shale-sourced natural gas-producing formation in the United States, faces some significant obstacles. According to industry experts, this region is currently dealing with takeaway constraints and is essentially in maintenance mode. The primary issue contributing to these challenges is the limited capacity of the existing pipelines in the area.
Another shale play that is experiencing a decline is the Haynesville shale. Reportedly, it has witnessed a more substantial drop in drilling rig count compared to other basins. Additionally, it also has the highest base decline rate. On the other hand, the Permian Basin continues to demonstrate growth in associated gas supply, although not meeting initial expectations.
Nevertheless, short-term weather conditions remain a crucial factor affecting the natural gas market. As climate change progresses, summers are becoming hotter and winters milder. Yet, there remains a possibility of colder-than-normal winter weather leading to temporary jumps in gas prices.
Recently, overnight weather forecasts have been revised to predict colder temperatures. This shift has influenced a rally in natural gas prices. Specifically, above-normal temperatures forecasted for the Rockies in the upcoming weeks have been reduced, indicating cooler conditions for the natural gas-sensitive northeast region in the 11 to 15-day outlook. Although these adjustments may not be significant, they have provided enough motivation for bullish traders to cover short positions.
Looking ahead to 2024, analysts at Raymond James foresee higher natural gas prices. Their predictions show an average of $4 per thousand cubic feet for Henry Hub natural gas prices. It is important to note that a thousand cubic feet is approximately equal to 1 million British thermal units.
These higher prices are anticipated to stimulate more supply growth and potentially cause demand erosion, creating a balanced market for the industry.
In conclusion, the Marcellus Formation is facing challenges due to takeaway constraints, while the Haynesville shale play experiences a decline in drilling rig count. However, the Permian Basin's associated gas supply is still growing, though not as anticipated. Short-term weather patterns can significantly impact the natural gas market, with the possibility of temporary price increases during colder-than-normal winters. Looking ahead, Raymond James expects higher natural gas prices in 2024, which may stimulate supply growth and influence demand in the industry.
