Natural Gas Production is Contracting

The implications for the humans species are profound

Conventional oil production peaked nearly 20 years ago, we have been desperately cannibalizing nuclear war heads to fuel reactors, and shale oil production is now declining. Renewable energy is nothing more than a mirage of hopium.

The fourth horseman of the apocalypse is now mounted - natural gas production is contracting.

WARNING - reading this will result in a sickening feeling in your stomach and high anxiety. Be sure to have some Extra Strength Xanax and a glass of water nearby.

If you are concerned that this will result in starvation, mass murder, rape, disease, and cannibalism, let’s not forget that The Men Who Run the World have an excellent Plan B.

Natural Resources Market Commentary - Q3 2024

Goehring & Rozencwajg Natural Resource Investors

In the volatile world of U.S. natural gas, the past quarter unfolded with all the drama of a Shakespearean act. Prices began at a modest $2.60 per Mcf, buoyed by the quiet equilibrium of early spring. But by mid-June, the plot had transformed. An unseasonal heat wave gripping the central United States sent prices soaring to $3.15, a rally that spoke as much to the market’s sensitivity as it did to the hot weather. Yet, as quickly as the heat arrived, it receded. Milder temperatures reclaimed the stage and gas prices tumbled in response, bottoming at $1.90 by the end of August.

While market participants obsessed over weather patterns, few paused to consider the silent protagonist in this unfolding drama: inventories. The 2023–2024 winter, among the warmest on record, left a legacy of near-record storage levels. At the outset of the injection season, inventories stood at a staggering 700 Bcf—or 40%— above the ten-year average. Yet, tight fundamentals have nearly erased this surplus in a remarkable turn. Over the third quarter alone, inventories were drawn down by almost 400 Bcf. By quarter’s end, storage levels stood less than 5% above the norm, a quiet but profound shift that few have fully grasped.

This brings us to the present moment, where the market stands at a crossroads. If the coming winter delivers typical cold—after two years of unseasonable warmth—U.S. natural gas prices could well align with international benchmarks which currently hover near $14/MMBtu. The implications are vast, mainly as U.S. natural gas production, once seemingly boundless, now hints of rolling over.

Over the past fifteen months, growth in U.S. gas production has stalled. Indeed, in the past seven months, production has begun to contract. Since peaking in December 2023, U.S. dry gas supply has fallen by 3 Bcf per day—a 3% decline. Year-over-year data tells a similar story, with dry gas production now down by 1.2 Bcf per day, slightly more than 1%.

The natural gas bears, ever resourceful, have latched onto recent productivity data, pointing to gains in drilling efficiency across several shale plays as evidence of a potential resurgence. Yet this narrative, seductive though it may be, demands scrutiny. Our analysis, informed by deep neural networks, reveals that these productivity gains are not the herald of renewed growth but rather the predictable consequence of declining rig counts.

Consider this: in August 2022, the Baker Hughes natural gas rig count stood at 166. By February 2024, that number had dropped to 121, a 27% decline. Over the past seven months, the rig count has fallen further, reaching just 101—a 17% plunge in a remarkably short time. As every seasoned industry observer knows, exploration and production companies cut their least productive rigs first, leading to an inevitable but temporary boost in reported drilling productivity.

But this veneer of efficiency masks a more profound truth. Producers, facing dwindling options, have concentrated their remaining rigs on the final Tier 1 drilling areas within their plays. This “high-grading” of inventories explains the reported productivity gains of the past eighteen months but also signals an endgame. Our analysis suggests that Tier 1 drilling inventory in these plays is rapidly being exhausted. The accompanying graphics in this letter’s “Shale Fields and the Hubbert Curve” section lay bare this reality, using the Marcellus as a case study in depletion dynamics.

The broader picture is no less sobering. All U.S. natural gas production sources, whether from dedicated shale gas plays or associated gas from shale oil operations, are plateauing. Against this backdrop, demand is poised to surge. LNG exports are set to expand dramatically, while the data center boom adds another layer of consumption to the mix.

The result? A market that is shifting, after fifteen years of structural surplus, toward a long-running structural deficit. The abundance of shale gas has defined the natural gas story for the past decade and a half. That era, we believe, is drawing to a close, and the implications for prices—and the broader energy landscape—are profound. Read More

Update:

The looming gas crisis facing the West

For decades, Norway has been Britain’s leading source of imported energy.

However, that relationship may be set to come under strain after the Scandinavian nation warned that its vast oil and gas fields are in decline.

The threat of dwindling production would herald a potential energy crisis for the UK, which last year relied on Norway for half its gas and a quarter of its oil.

According to a new report from the Norwegian Offshore Directorate (NOD), the country’s oil and gas supplies peaked last year and are expected to dwindle from now on. Source