Although consumers have enjoyed affordable natural gas for a couple of years, geological realities and producers’ understandable reticence to drill in such an unfavorable market are about to come calling, predicts a natural resource investment firm. According to Goehring & Rozenencwajg’s latest market commentary, the inevitable implications of the country’s natural gas output make it a promising time to invest in the commodity.

“Natural gas production is plummeting—a condition noted by almost no analysts,” the firm begins. “Between December 2023 and May 2024, U.S. dry gas supply has contracted by a notable 5.0 billion cubic feet per day—a nearly 5% reduction. On a year-over-year basis, the decline stands at 2.2 Bcf/d. The drawdown is the sharpest since the shale revolution began, excluding the 2020 Covid year. Both shale and conventional production have taken a hit, with shale output diminishing by 2.1 Bcf/d and conventional sources plummeting by 2.8 Bcf/d over the last five months.”

The 1.9 Bcf/d dip in shale production the country had witnessed by May constituted the first non-pandemic-related year-on-year decline, the firm indicates. It notes that Marcellus output has fallen 1.1 Bcf/d since December and the Haynesville has shed 500 million cubic feet a day during the same interval.

The Permian Basin, which saw a gain of 265 MMcf/d during the same period, remains the lone growth exception, G&R observes. “The Permian’s resilient gas production, despite a concurrent decline in crude output, raises intriguing questions,” the report suggests. “The basin’s rising gas-to-oil ratio has been a topic of much debate, with some analysts pointing to it as evidence of maturation—a sort of geological canary in the coal mine.

“The theory suggests that as a basin depletes, field pressures decline, allowing more gas to escape from solution and rise up the well bore—a phenomenon akin to a soda can being opened,” the analysis continues. “A petroleum engineer would say an increase in the gas-oil ratio is a signal that declines in a basin’s oil production is rapidly approaching.”

G&R acknowledges a longstanding skepticism of such prognostications, but says it is warming to them. “The Permian’s gas growth, we argued, was a simple matter of shifting rigs from the oil-rich Midland to the gas-heavy Delaware,” it recounts. “But recent divergences between oil declines and gas growth warrants a reconsideration of our theory. Could it be that depletion is finally impacting the gas-oil ratio? If so, we should expect the Permian’s oil and gas output to both exhibit declines.”

Both Prices And Geology

G&R acknowledges that conventional wisdom largely has linked slackening U.S. gas output with lackluster commodity prices. “The Henry Hub benchmark has languished at $2.00 an MMcf throughout 2024—a level not seen in the last quarter-century except in the nadirs of 1999, 2016 and 2020,” the firm recalls. “In those years, oil prices were equally depressed, with WTI averaging $14, $27 and even plunging to -$47 per barrel during the pandemic. Today, WTI trades at $75 per barrel, yet natural gas, on an energy-equivalent basis, remains at an 84% discount—a discount reminiscent of the all-time low in 2012.”

Low prices have been a definite drag on drilling activity, the commentary indicates, noting the gas-directed rig count stands around 100 rigs after hitting 166 in 2022 and 200 in 2019. Even so, the firm reasons, price alone does not tell the whole story.

“We posit that the shale gas basins are simply running out of high-quality drilling inventory,” G&R theorizes. “Our proprietary neural network, developed in 2018 to analyze shale trends, has long indicated that the Marcellus, Haynesville and Permian were approaching peak production. Now, all three basins have produced 50% of their total recoverable reserves, a harbinger of imminent declines. Particularly in the Marcellus and Haynesville, the depletion of Tier 1 drilling locations combined with falling rig counts strongly suggests that production declines should accelerate.”

The commentary goes on to draw a parallel with the oil shales during the Covid-induced downturn. In late 2019, the firm says, G&R’s neural network foresaw declines in the Bakken and Eagle Ford, with the Permian soon to follow. “When oil prices collapsed, the rig count plummeted, and production followed suit,” it notes. “Many believed the declines would be temporary, rebounding as prices recovered. But as oil climbed past $50, $60 and even $70 per barrel, it became clear that geology, not economics, was the culprit. Apart from the Permian, none of the mature shale basins were able to regain their pre-Covid highs in drilling activity.”

Now, the firm says its models suggest that every shale gas basin, including the associated gas from the Permian, will follow the Bakken and Eagle Ford’s 2019 examples. “Will history repeat itself?” the analysis poses. “Will higher prices fail to reverse the underlying depletion and arrest the production decline? We believe the answer is yes.”

According to G&R, inventory trends show the U.S. natural gas market is gripped by a sharp and sustained deficit. It notes that mid-March’s unusually strong national inventories of 700 Bcf above the five-year seasonal average fell by more than half in only five months.

“Once in surplus by approximately 1 Bcf/d, the U.S. gas market has swung into a deficit of over 2 Bcf/d—one of the sharpest reversals on record,” the firm observes. “While a hotter-than-average summer contributed to this shift, our models attribute most of the change to collapsing production. When we last wrote, we expected inventories to end July 544 Bcf above average; instead, they were only 435 Bcf higher than normal. By mid-August, the surplus had eroded further to just 325 Bcf.”

LNG Factor

The firm notes that its previous forecast predicted year-end inventories would exceed the five-year average by about 360 Bcf and would fall into a deficit sometime in 2025. However, the analysis says that cushion may disappear much sooner, while at the same time new U.S. LNG export capacity is coming on line.

“The next two years will witness the fastest growth of LNG export capacity in U.S. history,” the commentary notes. “Where the industry will source the gas remains an open question.”

The firm acknowledges that setbacks and delays inevitably will slow new LNG terminals, and cites examples such as the second-quarter announcement from the Golden Pass project that a contractor’s bankruptcy would postpone its first train by three months.

While delays are typical, it concludes, the projects eventually begin service. “While delays such as this postpone one source of new short-term demand, our medium-term outlook remains unchanged,” the G&R assures. “U.S. natural gas trades at an 84% discount to its energy equivalent, making it the cheapest molecule of energy on the planet. Gas for delivery in Europe remains $12 per Mcf, while Asian LNG fetches $13.50 per Mcf, compared with $2.00 in the United States.

“As new LNG demand comes on line and production continues to disappoint, inventories will continue to tighten, pushing prices toward the global benchmark,” the analysis concludes. “We cannot recall a more asymmetric investment opportunity than U.S. natural gas.”