Natural Gas Trends Higher After EQT and Chesapeake Energy Announce Cuts in Production

Energy News: 11 March 2024 Natural Gas Trends Higher After EQT and Chesapeake Energy Announce Cuts in Production Natural

Energy News: 11 March 2024

Natural Gas Trends Higher After EQT and Chesapeake Energy Announce Cuts in Production

Natural Gas is the largest source of power for generation of Electricity; therefore, their pricing is highly correlated, which is why we focus on Natural Gas in our reports.

In our Feb 26th Energy Update we explained why Natural Gas producers will be forced to cut production in response to today’s unsustainably low prices. Prices are unsustainably low when they decline below the cost of production, and producers respond by making strategic decisions to curtail production to support higher prices in the future. 

Last week, EQT, presently the largest U.S. Natural Gas producer, announced it made the strategic decision to cut production by approximately 1 Bcf per day starting in late February and they will maintain this curtailment through March and reassess market conditions thereafter. Although they are keeping their options open, they will likely maintain lower production while prices remain low.

Also, when Chesapeake Energy announced on Feb 21st in response to the recent plunge in prices, they were cutting the amount of fuel produced in 2024 by roughly 30%, Natural Gas immediately reversed its decline to $1.52 per MMBtu and has continued to trend higher. The market’s response to this news was appropriate given Chesapeake Energy is expected to become America’s largest producer of Natural Gas after its merger with Southwest Energy.

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In addition to the 2 largest producers cutting production, it is important to note the cuts are expected to be industry wide as confirmed by Baker Hughes’s latest report revealing America’s Natural Gas drillers have decreased the number of active rigs over the past year by 25%. The Baker Hughes rig count is an important  barometer of future oil industry drilling production. 

In our Feb 26th Energy Update we said prices were not expected to remain near today’s very low prices for an extended period; therefore, Natural Gas’s recent rally was not unexpected.  

We came to this long-term conclusion by reviewing data from the Energy Information Administration’s (EIA) website, which revealed there were 2 similar instances in 2012 and 2016, when Natural Gas’s total supplies were higher than where supplies are expected to be this year on March 8th, and in both cases Natural Gas prices were much higher by the end of the year.

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In 2012 and 2016, similar to this year, we experienced warmer than normal winters resulting in supplies reaching record levels, but by the end of the year prices more than doubled! 

The takeaway from the above 2 charts is this year with Natural Gas near the lowest prices since 2000, and with EQT and Chesapeake Energy announcing production cuts the conditions supporting a major bottom are in place, and although prices could go slightly lower in the near term, based on past history the average price of Natural Gas will likely be much higher long-term.

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Therefore, if your present energy agreements expire in 2024 or 2025, we recommend you take advantage of this year’s historically extremely low prices, and reserve energy to be available when your present agreements expire.

We believe the average price will be higher long-term, and the upside risk is much greater than the downside potential of waiting hoping for slightly lower prices.

Not every client’s risk tolerance and hedging strategy are the same, but hopefully, today’s report will help put into perspective your risk/reward opportunities. We invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.

Ray Franklin
Energy Professionals
Senior Commodity Analyst

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