Shares of natural-gas producer EQT are up 45% this past month.
Dreamstime
Oil prices have faded, and are now nearly back to where they traded before Russia’s invasion of Ukraine. But natural gas continues to soar to new multiyear highs.
On Monday, U.S. gas futures settled at $6.64 per million British thermal units, their highest level since 2008.
The dynamic has had a major impact on stocks, with natural gas producers outperforming companies that produce more oil. In the past month, Exxon Mobil (ticker: XOM) is down 0.7% and ConocoPhillips (COP) has traded flat, while natural gas producer EQT (EQT) is up 45% and Southwestern Energy (SWN) has risen 44%.
One major reason for the strength in natural gas is that demand for gas looks likely to stay strong throughout the year, instead of falling off in the spring.
Normally, demand for gas tails off when the weather gets warmer because fewer people need gas for heating. But this year, Europe is planning to stockpile much more gas for the coming winter, filling its storage units to at least 90% of capacity. The EU wants to build a buffer that will allow it to wean itself off Russian gas, which has historically accounted for as much as 40% of its supply.
The more gas that the U.S. exports, the more likely it is that domestic gas prices stay high. For several years, U.S. consumers have been insulated from international gas prices because the country did not export much of its supply. So, while prices in Europe and Asia spiked to record highs earlier this year, U.S. gas was selling for less than one-fifth as much. But that discount may soon disappear. The U.S. started sending ships full of liquefied natural gas to other countries only in 2016, and exports have increased rapidly, particularly in the past couple of years. Now, U.S. LNG is a critical part of Europe’s plan to defund Russia.
As of March, it seemed unlikely that the U.S. could increase shipments to Europe within the next two years, but companies have recently said they will be able to expand capacity in the near term. The U.S. exports about 11 billion cubic feet a day of LNG.
Three companies have made announcements in recent days about expansions or changes to their operations that can collectively add another 800 million cubic feet a day to the market–“a boost in the arm” to demand, according to Tudor Pickering Holt & Co. analyst Matthew Portillo.
In addition, Asia is ramping up construction of natural gas importation facilities to replace coal in electricity production, allowing even more LNG to flow overseas.
“The bottom line is between reducing Russian dependence for Europe and coal dependence for Asia, an absolutely massive call on U.S. gas exists over the next several years,” said Matt Sallee, senior portfolio manager at Tortoise Capital Advisors, on a recent podcast.
Write to Avi Salzman at [email protected]
