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ANALYSIS: Surging North American natural gas prices look to test major producers' discipline

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ANALYSIS: Surging North American natural gas prices look to test major producers' discipline

Highlights

Henry Hub forwards stay above $4

Private operator rigs 2% below pre-pandemic numbers

Elevated cash and futures natural gas prices at hubs across North America look to test producers' prior commitments to disciplined capital expenditures and low, steady production growth.

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As concerns about low supply mount across North America, keys hubs across the continent from Henry Hub to AECO continue a sustained price surge.

Henry Hub forwards closed out another bullish week on July 23 as forward contracts continued to push higher, settling with the balance-of-summer strip at $4.05/MMBtu, 6 cents weaker than the Winter 2021-22 strip of $4.11/MMBtu.

To start the week of July 26, Henry Hub forward contracts all sit above $4/MMBtu until March 2022, which drops to $3.86/MMBtu. Spot prices broke above $4/MMBtu during July 23 trading for the first time since Winter Storm Uri as warmer temperatures hit most parts of the Southeast and Texas. The strength in the forwards market remains a function of rising demand amid flat production.

With gas-to-coal switching unable to curb demand during the peak summer months, Henry Hub prices have few anchors to keep them from jumping further. In addition, storage inventories are struggling to inject, bringing refreshed concerns on stock levels if any colder-than-normal weather arises this winter.

AECO's outlook is quickly improving along with Henry Hub. Henry Hub's recent surge pulled AECO cash prices to nearly US$3.30/MMBtu on July 26. Futures are looking just as bright, with AECO's balance-of-summer 2021 strip trading at $3.21, and the winter 2021-22 strip trading at $3.40. Even summer 2022's $2.37 strip pricing is likely more than acceptable for many producers, especially during the summer months.

This will test North American producers' commitment to stick to their capital expenditure guidance and tempt them to grow production beyond current plans. S&P Global Platts Analytics is forecasting Canadian gas production will grow 600 MMcf/d winter over winter based on producers plans laid out earlier in 2021.

However, should they grow production more, Platts Analytics estimates the Nova Gas Transmission's Upstream James River production zone will have 700-1,000 MMcf/d of space available beyond what its forecast implies will flow through there this winter

US dry gas production was 90.9 Bcf/d on July 26 as the Northeast and Texas reported marginal drops while other regions noted negligible increases. US growth has been slow to realize summer to date as production continues to hold flat between 90-91 Bcf/d. Though the Haynesville is inching higher, the Permian is staying flat. Platts Analytics expects total US production to hit 92.5 Bcf/d by December, namely on the back of a winter ramp in the Northeast. It is forecast to average 91.7 Bcf/d in 2022 based on the current drilling outlook.

Capital discipline from public companies is reducing oil and gas growth, while smaller, private companies are the ones driving most of the drilling activity. The rig count for small, private operators is only 2% below pre-pandemic levels while majors are still 68% below. Larger non-public operators are keeping capital discipline but with less rigor than the majors. Small private operators have increased drilling activity at more than twice the rate of other operators, and currently represent 59% of total US rig count. They represented 42% when the pandemic started in March 2020.