U.S. Natural Gas and COVID-19: a patient with mild symptoms

[Tom Kirkman + 8,860]

PDF of a 7 page analysis attached below.  Lots of data and charts.

Link to the pdf: 

https://www.fxstreet.com/analysis/us-natural-gas-and-covid-19-a-patient-with-mild-symptoms-202005010308

U.S. Natural Gas and COVID-19: a patient with mild symptoms

The natural gas industry will not be immune to the devastating impact that COVID-19 has had on the economy. Demand in the industrial and services sectors will significantly go down due to the extended "stay-at-home" policies across the states.

However, even before the pandemic, the industry was negatively affected by warmer-than-average winters and excessive production, despite increasing efforts to substitute coal with natural gas for the generation of electricity. Since November 2019, the market showed signs of oversupply, as the Henry Hub benchmark continued to slide down. In February 2020, prices went down to less than $2 per million of British thermal units (MMbtu), well below what is considered an average break-even price of $2.5/MMbtu.

Consequently, write downs and capex reductions were announced early in the year, particularly for companies operating in the Appalachian region. Production in Marcellus and Utica, two vital Appalachian shale plays entered a plateau. This stall suggests that current natural gas prices no longer support increasing drilling activity. Thus, further declines in Appalachia production seem unavoidable.

 

COVID-19 will likely exacerbate an expected decline in production. However, its effects won’t be as catastrophic as they have been for the crude oil market. This is because the natural gas market has distinct characteristics in both production and consumption, which result in different price dynamics. In fact, since 2009, volatility in natural gas prices has been significantly lower than crude oil prices (see Natural gas prices after the shale boom, BBVA Research, 2018). Since natural gas is mostly produced and consumed domestically, we do not expect the sometimes rampant effects from geopolitics, information asymmetry, and price competition observed in the crude oil market.

 

A domestic-oriented market

Thanks to the booming shale industry, in the last few years, the production of natural gas has been steadily increasing, reaching a historical record at 102.8 billion cubic feet per day (Bcf/d) at the end of 2019, compared to 75.5 Bcf/d at the beginning of 2017.

Nearly 17% of U.S. natural gas production comes from oil wells, which is called associated gas and considered a byproduct of crude oil production. In general, associated gas is a mixture of methane and other natural gas plant liquids (NGPL), such as ethane, propane, normal butane, and isobutene. Therefore, the "wet" part, like crude oil, can be processed and provide inputs in the petrochemical industry.

Meanwhile, since crude oil is the primary source of revenue for operators of these wells, the output of associated gas is generally driven by the production of oil, which carries higher margins (Figure 3). This is the case for natural gas produced in regions with low-permeability and tight rock formations such as the Anadarko, Bakken, Eagle Ford, Niobrara, and Permian. Among these, the Permian is the most prominent region, accounting for nearly 43% of the total production of associated gas.

Non-associated natural gas accounts for about 80% of total output. The most prominent producers are in the Appalachian region that includes the Marcellus and Utica shale plays.  ...

 

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PDF attached:

U.S. Natural Gas and COVID-19 a patient with mild symptoms - - BBVA Research.pdf