As everyone reading this is no doubt well aware, natural gas prices have declined significantly year-to-date. As of the time of writing, natural gas at Henry Hub is down 47.81% since January 1, 2023:
In fact, the current price is back to levels that we have not seen since the pandemic drove down the price of anything in the energy industry. Unlike the usual scenario of crude oil and natural gas being somewhat linked in terms of prices, crude oil has held up much better than natural gas in recent months. Year-to-date, West Texas Intermediate crude oil is only down 9.3%:
As might be expected, the steep decline in natural gas prices has had a significant impact on the stock prices of natural gas producers. There are not too many of these, as most upstream companies produce both crude oil and natural gas. However, there are a few located in the Marcellus and Haynesville Shale plays, as these are natural gas basins and are rather limited in terms of crude oil. Here is the year-to-date stock performance of a few of the natural gas pureplay producers:
|Company||Year-to-Date Stock Price|
|EQT Corporation (EQT)||10.50%|
|Range Resources (RRC)||12.84%|
|Comstock Resources (CRK)||-20.25%|
|Antero Resources (AR)||-21.25%|
|Chesapeake Energy (CHK)||-5.93%|
Honestly, I should have published this report yesterday as both EQT Corporation and Range Resources surged this morning for reasons that we are about to discuss. The two companies were both delivering disappointing performance up until today.
Natural Gas Supply Glut
The reason that we have been seeing such a weakness in natural gas prices this year is because of a supply glut. In short, the United States is substantially oversupplied with natural gas right now due to two factors:
- The Freeport LNG fire in June 2022 shut down the plant until February of this year. That plant consumes a substantial amount of natural gas and the shutdown meant that it was no longer purchasing and consuming gas for the duration.
- The United States experienced a warmer winter than normal, so natural gas was not consumed by residential and business users as usual. Thus, the usual supply drawdown that typically occurs every winter did not occur.
Due to the law of supply and demand, natural gas prices typically decline when there is a surplus of the compound relative to the demand. This is true with crude oil as well, which is why crude oil prices fell sharply when the pandemic broke out in 2020 and people stopped traveling as much as usual.
It is rather surprising that it took so long for upstream energy producers to address the supply-demand imbalances for natural gas, but they finally have. On Friday, Baker Hughes stated that exploration and production companies reduced the number of rigs that they have in their fields by sixteen last week. This was the largest week-over-week decline since February 2016:
As some of you may recall, February 2016 was the tail end of the energy bear market in the middle of the decade. That bear market was caused by the member nations of the Organization of Petroleum Exporting Countries (OPEC) deliberately trying to keep crude oil supplies high in an attempt to bankrupt the emerging American shale industry. That period did see a number of high-profile American companies go bankrupt and very low crude oil prices. Thus, the fact that last week’s rig count decline was the largest since then is certainly saying something!
The market has already reacted to this news, as Seeking Alpha reported yesterday that natural gas futures were up 4.8% in the Monday trading session. This is almost certainly the thing that pushed up the stock prices of both Range Resources and EQT Corporation, as we can clearly see that both stocks shot up substantially yesterday afternoon:
It is important to note that this is just a short-term event. The long-term thesis for natural gas continues to remain solid, as natural gas is likely to see growing demand around the world due to its use as a supplement for the intermittent production of solar and wind power.
Disclosure: I am long RRC as of the time of writing.