Natural gas prices have shot up nearly 60% since late June, and speculators are betting they will keep climbing. But the companies that control the country’s spigots aren’t so sure.
Appalachian energy producers are taking a cautious approach to reopening the taps they shut in spring when the coronavirus pandemic torpedoed prices in an already glutted market.
These companies flooded the market in recent years and have effectively become the swing producers in the newly global market for U.S. shale gas. Their reticence to chase rising prices is supporting the market. But by keeping gas in the ground, they risk missing out on a rare period of climbing prices that could quickly reverse.
“Given the way the world is now, you’re more likely to see producers respond to weak pricing rather than a response to strong pricing,” said Anna Lenzmeier, who studies Northeastern gas markets for BTU Analytics, a Lakewood, Colo., research firm.
Workers prepare to complete a CNX well.
Producers operating where Pennsylvania, Ohio and West Virginia meet—a region that includes some of the most prolific wells ever drilled—have become particularly responsive to price swings, Ms. Lenzmeier said.
The huge volumes of fuel that they can bring to market with minimal drilling in places like Greene County, Pa., enable them to meet demand in a hurry. Meanwhile, a network of pipelines allow them to steer their output between Chicago and other Great Lakes cities, or to Gulf Coast chemical makers and exporters, depending on where prices are best, she said.
Earlier this year the coronavirus shutdown prompted overseas buyers to cancel shipments of liquefied natural gas, or LNG. Domestic stockpiles swelled. Prices tumbled even after producers like EQT Corp., the country’s largest, and CNX Resources Corp. choked back wells to take significant volumes of gas off the market.
A worker prepares to pump chemicals into CNX’s well as part of the hydraulic fracturing, or fracking, process that coaxes natural gas to the surface.
By late June, natural gas futures for July delivery hit $1.48 per million British thermal units, the lowest price in a quarter-century. Prices have been on the upswing since, thanks to steamy weather that’s had air conditioners blasting and rebounding demand from the facilities that liquefy gas for export as economies world-wide emerge from lockdown.
Futures for September delivery ended Thursday at $2.35, up 6% from the same time last year. Gas to be delivered in December, when heating demand picks up, has risen to $3.13.
Hedge funds and other speculators are betting that prices have room to run. The number of wagers they have made that prices will climb outnumber bets on falling prices by the biggest margin since early 2019, according to Commodity Futures Trading Commission data.
An employee of Evolution Well Services monitors a hydraulic fracturing job.
Investors also have been betting on shares of natural gas producers, particularly those operating in Appalachia, such as EQT and CNX. Their stocks are up 45% and 26% this year, respectively. With a 69% advance, Range Resources Corp. leads the pack of six Appalachian gas producers that are the only nonbankrupt U.S. energy producers with positive returns in 2020.
Behind the optimism is the belief that the onset of heating season in the Northern Hemisphere will coincide with a strengthening world economy. Meanwhile, gas inventories have shrunk due to curtailments in Appalachian and less oil drilling, which produces a lot of gas as a byproduct.
The uncertainty of the economic recovery and the potential for domestic gas storage facilities to fill up ahead of winter have some analysts less optimistic. “We see more risk than opportunity for the commodity right now,” Houston’s Tudor, Pickering, Holt & Co. told clients.
Gas producers themselves, stung by years of selling gas at ever lower prices, are also circumspect.
Efficiency improvements have enabled Appalachian gas production to nearly double since 2014 despite about a quarter as many rigs drilling.
Executives at EQT, which took roughly 25% of its output offline in May pending higher prices, said they think futures for next year are priced too low. They have said the company is more likely to hold back even more production than ramp up drilling.
CNX expects to reopen its shut-in wells around Nov. 1. It could do so sooner if near-term prices continue their hot streak, but the Pittsburgh company may just as well keep the gas in the ground longer if prices are weak, executives say.
“If we don’t end up with a cold winter, the bull case for ’21 is pushed into 2022,” CNX Chief Operating Officer Chad Griffith told investors recently. “Producers hoping and praying for those stronger ’21 gas prices are basically betting the balance sheet on winter, and that is a risky proposition.”
CNX plans to employ just one drilling rig and a lone hydraulic fracturing crew for the remainder of this year and all of 2021 due to weak commodity prices.
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Write to Ryan Dezember at ryan.dezember@wsj.com
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