What Do Natural Gas Fundamentals Suggest for 2H 2019?

Natural gas and energy stocks

On Tuesday, natural gas August futures rose 0.9% and settled at $2.425 per million British thermal units. On the same day, EQT (EQT), Antero Resources (AR), and Range Resources (RRC) rose 3.8%, 1.7%, and 1.5%, respectively. EQT, Antero Resources, and Range Resources operate with a production mix of ~99.7%, ~71%, and 69.2%% in natural gas. US crude oil prices rose 0.3% on the same day. The rise in the energy commodity space might have fueled the upside in these natural gas–weighted stocks. On Tuesday, the S&P 500 Index (SPY) rose 0.1%.

What Do Natural Gas Fundamentals Suggest for 2H 2019?

Natural gas fundamentals

On Tuesday, the EIA (U.S. Energy Information Administration) released its STEO (Short-Term Energy Outlook) report. For the rest of this year, Henry Hub natural gas spot prices will be at a mean price of 2.50 per million British thermal units—a fall of ~9% on a sequential basis. The EIA lowered its natural gas price forecast 10.4% compared to the previous month. The EIA revised the dry natural gas production figure for 2019 from 90.6 Bcf (billion cubic feet) per day in June to 91.3 Bcf per day in July. The natural gas demand will likely rise by 0.4 Bcf per day from the earlier forecast. The production and demand figures are at an all-time high.

The production growth will likely outpace demand growth. The production growth could limit any upside in natural gas prices. With US natural gas exports rising to 5.1 Bcf per day and 8.1 Bcf per day in 2019 and 2020, the gap could be narrow. In 2018, the net natural gas exports were at 2 Bcf per day.

In the trailing week, natural gas active futures rose 8.3%. The hotter weather forecast might have supported natural gas prices. However, OPEC’s decision to extend the production cut into March 2020 could be a headwind for natural gas prices in 2019. On Thursday, the EIA’s inventory data will be crucial to sustain natural gas’s recovery.

Key technicals

On Tuesday, the natural gas active futures were 1.4%, 6.2%, and 19.7% below their 50-day, 100-day, and 200-day moving averages, respectively. On the same day, the natural gas prices were 4.7% above their 20-day moving average. Natural gas prices breaking above this shorter-term moving average on July 5 suggests a short-term pullback in prices.

Rig count

The natural gas rig count was 174 last week—one more than the previous week. The natural gas rig count has fallen ~89.2% from its record level of 1,606 in 2008.

Between January 2008 and March 2019, US natural gas’s marketed production rose ~65.1% despite the falling natural gas rig count. As a result of the increased supply, natural gas active futures have fallen 69.1% since January 2008. Natural gas–weighted stocks Southwestern Energy (SWN) and Gulfport Energy (GPOR) have fallen 90.3% and 76.6%, respectively.

Rising US oil production is the key factor behind the increase in natural gas supplies. Since natural gas is often a byproduct of US shale oil production, it’s important to monitor the oil rig count to understand natural gas supplies.

Crude oil rig count and natural gas–weighted stocks

Between January 4, 2008, and July 5, 2018, the oil rig count more than doubled. Based on the relationship between oil prices and the oil rig count, the oil rig count might bottom out in July. Last week, the oil rig count fell by five to 788—the lowest level since February 2, 2018. A possible rise in the oil rig count might increase the natural gas production growth rate this summer.

The movement might impact natural gas’s upside. In the last quarter, based on the average closing prices, Henry Hub natural gas prices fell ~12.5% on a sequential basis. Southwestern Energy and Gulfport Energy’s EPS will likely fall 51.8% and 18.2% sequentially in the second quarter based on analysts’ consensus estimates.

EIA’s report

In the Drilling Productivity Report released on June 17, the EIA estimated that seven major US shale regions will add another 798 million cubic feet of natural gas per day in July compared to June. The natural gas additions have risen ~17.1% YoY (year-over-year).

According to the EIA, the new well gas production per rig from the major seven shale regions could fall 0.4% in July compared to June. The rig-weighted average has risen ~6% YoY. Rising rig efficiency due to technological advancement supports the higher natural gas output even with the lower rig count.