U.S. natural gas prices could continue to head higher, and that could be a positive for companies that produce, process or transport the commodity. The gas market is in a perfect storm, and some analysts say it is nearing an important turning point, where prices risk shooting dramatically higher. At the same time, any improvement in production, drop in demand or solid build in inventories could send prices lower. Russia's invasion of Ukraine in late February came as natural gas inventories were already below normal levels, particularly in Europe. U.S. inventories are currently about 18% below the five-year average. Cold late spring weather, with snow in the mid-Atlantic and New England, and expectations of higher demand from Europe drove natural gas futures sharply higher Monday. "Any time inventories are low like they are today, almost 20% below normal, and you have $35 gas in Europe, you just don't have any margin for error," said Rob Thummel, senior portfolio manager at TortoiseEcofin. U.S. natural gas futures prices Monday broke above $8 per million British thermal units [mmBtu] for the first time since 2008. Futures settled at $7.82 mmBtu on Monday, up 7.1%. Natural gas futures are up about 110% since the start of the year. John Kilduff, partner at Again Capital, said the futures market has expectations for rising prices that peak at $8.25 per mmBtu in the January contract. "It's back in the $4s come next summer," he said. Kilduff said the gas price chart looks risky. "We're pricing in the ramp-up right now," he said. "If this is going to keep pricing in this hopium, I would expect the top could be out in the $12 to $15 area," he said. The technical setup on the natural gas chart looks fraught with warnings, Kilduff said. "It's called the widow maker for a reason." The stocks of gas producers have shot up with the natural gas price. EQT, the largest U.S. gas producer, is up 109% year to date and Southwestern Energy has risen 82%. Thummel said he also likes infrastructure plays like Kinder Morgan and Williams Cos. To help reduce Europe's energy dependence on Russia, the U.S. has promised to send more liquified natural gas to Europe . It will not be enough to make up for Russia's exports to Europe, which had been about a third of the Continent's gas supply. Analysts said that is helping support the U.S. price, though the U.S. is a separate market and prices are much lower. $20 gas? Matt Palmer, senior director North American natural gas at S & P Global Commodity Insights, said a case could be made for a big jump in natural gas prices this spring. "The market is concerned about too much demand and not enough production," said Palmer. "I think if production doesn't start growing, and inventories go further below the 5-year average, then we could see prices really get much higher. I'd say $15 to $20. ... It's because there's no relief valve." Palmer said he does expect production to grow by 4.5% this year, and if there's an increase in inventories, prices could quickly calm down. But if it's a hot summer, there could continue to be pressures on inventories, and a cold April can be a problem since it is typically a time for inventories to build. But he said there's another big reason behind the volatility in natural gas prices. Coal deficit weighs on gas prices "The real story here is the electric power sector," he said. "In the last decade, we have lost about a third of the coal-generating units, and over the next decade we expect almost a lot of the rest of them to retire. So there's very little coal left after 2030." Utilities have traditionally switched between coal and gas, depending on where the price was more favorable. In 2020, demand for coal dropped off, but it rebounded as gas prices increased and more utilities switched back to coal. Coal is also exported so there is competition from international markets. "The switching between coal and gas in the power sector has provided the biggest swath of flexibility to keep the market balanced," he said. "We're losing that flexibility and we can see how it's pricing today. ... That's happening because we lost the elasticity of demand in the power sector. What we're seeing is coal and gas prices are chasing each other higher." Palmer said he estimates that coal stocks are at 10- to 15-year lows, and prices have skyrocketed. U.S. coal producers are also exporting more coal. Palmer said for instance, Illinois basin rail coal is up 300% from a year ago, and it now costs utilities a price equal to natural gas at about $7 and $8 mmbtu. The pressure on coal should continue. "It's not just natural gas Europe is trying to replace. They banned Russian coal," Palmer said, noting the ban will start in August. U.S. gas exports Palmer said about 75% of U.S. LNG exports in the first quarter went to Europe, versus about 25% last year. U.S. export capacity should grow but not by much for several years, while more facilities are built. "It's a limited amount of capacity - 13 to 15 bcf [billion cubic feet] a day of liquifaction capacity," Palmer said. LNG exports total about 15% of U.S. demand. Thummel said the biggest increase in U.S. LNG is slated for 2025 when an Exxon Mobil, Qatar Petroleum partnership at Golden Pass and the third stage of Cheniere's Corpus Christi, Texas, project add about 3 billion cubic feet per day. A cubic foot equals about 1.2 trillion British thermal units. "If you want to invest in LNG, the commodity per se, Cheniere, the stock is the way to do it," said Thummel. "They have cash flow, pay a dividend. ... The outlook for LNG the commodity is tremendous." Thummel said in 2021, Cheniere shipped 566 cargoes of LNG. With the U.S. expected to send an additional 1.5 bcfs of LNG per day to Europe by the end of the year, the industry would ship an estimated 186 additional cargoes, he said. Other LNG plays include Sempra, which owns LNG export facilities, and Tellurian, which has been a more volatile stock, Thummel noted. Thummel is not in the camp that expects a big price jump in U.S. natural gas unless Europe cuts off Russian gas altogether. "I still think what's going to happen is this is all going to trickle down," he said. "Asia has a bunch of coal. ... They will likely start using that will lower their demand [for LNG]. That will go to Europe. ... Europe is not quite as much in a deficit as they were a few weeks ago. They were down 20%, but now they are 15%."
A worker with Apache Corp. is viewed at the Patterson 298 natural gas fueled drilling rig on land in the Permian Basin on February 5, 2015 in Mentone, Texas.
Spencer Platt | Getty Images
U.S. natural gas prices could continue to head higher, and that could be a positive for companies that produce, process or transport the commodity.