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High gas prices further repair balance sheets, though producers
remain reticent to grow volumes.
Capital discipline and low storage have created a nearly
unprecedented scenario for high gas prices, but hedging mutes the
windfall. Despite natural gas directed capex rising nearly
50% from $13 billion last year to $19 billion this year, gas demand
growth will continue to outpace supply this year. Additionally,
significant portions of that additional capex will be consumed by
inflation—labor and rig rates chief among those
factors—further reducing the impact of the increased spending.
Storage levels have also been left low after a longer-than-normal
cold season, creating additional anxiety about gas supply and
pushing Henry Hub above $8/MMBtu in recent weeks. Gas-focused
operators realized more than $10 billion in hedging losses during
2021 and have hedged more than half of 2022 production at prices
from $2.50-3.50/MMBtu, so financial benefits from current Henry Hub
prices will be muted.
Dry gas production will grow 4.4 Bcf/d this year,
largely to refill storage, before tapering to 1 Bcf/d of growth in
2023, with prices responding accordingly. Haynesville will
be the main source of new volumes, growing nearly 3 Bcf/d this
year, while Appalachia will grow a smaller 0.6 Bcf/d. Associated
gas will resume its role in delivering growth as oil production
increases by 1 million b/d, bringing on an additional 2.5 Bcf/d
this year (over 1.5 Bcf/d just from the Permian). Next year, price
and associated gas force a decline of nearly 2 Bcf/d in Appalachia,
as the Haynesville grows by 1 Bcf/d and the Permian grows by nearly
2 Bcf/d.
Gas producers will experience another challenging year
in 2023, as a lack of demand growth and storage needs will
challenge prices. Despite an expected Henry Hub average
price of $5.70/MMBtu this year, the high price party may be
short-lived. As gas production increases, the threat of
insufficient gas volumes in storage will subside, with expectations
of reaching 3.5 Tcf by summer 2023. As storage fills, prices will
retreat to $4/MMBtu next year and below $3.50/MMBtu in 2024. Lower
prices combined with growing associated gas will push Appalachian
volumes lower in 2023. Note, however, that this premise requires
production volume growth showing up over the next few months.
Should growth not start soon, prices will remain elevated as
storage remains at concerningly low levels.
