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Natural Gas Will Benefit As Oil Producers Shut-In Production

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Welcome to the shut-in edition of Natural Gas Daily!

Weather models over the weekend turned bullish leaving the natural gas market now undersupplied by ~2 Bcf/d until the end of April.

This, combined with total gas supplies now trending lower, leaves the market in a precarious situation.

While storage remains bloated versus the 5-year average for now, US shale oil producers will start to shut-in production in Q2 2020 due to very low price realizations.

IHS estimates that US oil production could lose one-third of its volume in Q2 from shut-ins.

Platts also estimates that if WTI remains sub-$35/bbl WTI, US oil production will drop to 9.75 mb/d by year-end.

With associated gas production accounting for ~40% of US natural gas production, any significant drop in US oil production will directly benefit the natural gas market. Production shut-in in April will translate to a much tighter storage outlook, and already, we are seeing our November EOS move to 3.75 Tcf despite a higher storage level start to the 5-year average.

If production decline is severe by May (sub ~90 Bcf/d), we estimate that LNG exports will have to drop by half if not more. Prices in the US will rise to a level that forces an LNG export shut-in due to negative economics being overwhelming. At the moment, economics for summer gas prices are around $2.65/MMBtu. This means prices will have to rise above that for LNG to start shutting in.

For the time being, we have lost over ~1 Bcf/d of production versus last month already, so we should see the volumes show-up throughout April.

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All of this just means that, if oil prices remain low, natural gas prices will rise as associated gas production starts to fall.

We see near-term upside for gas prices above $2/MMBtu once shut-in volumes show up in pipeline data.

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Disclosure: I am/we are long UGAZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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