3Q 2020 Oil & Gas Market Update - Is The Natural Gas Market Heating Back Up?


The EIA reported that Q3 Natural gas prices were depressed due to continued lower power plant usage due to COVID demand reduction, lower LNG exports out of the Gulf of Mexico, and milder summer temperatures. This compounded an already difficult 2020 for oil & gas producers, when natural gas future prices dipped below $1.85/MMBtu, testing break-even costs for producers within Marcellus and other shale basins. Producers responded by curtailing rigs and slowing down production, in the face of a shrinking or negative margin.

Figure 1 Natural Gas Futures Prices via Direct Swap

However, these headwinds might be behind the industry as it enters Q4-2020 and on into Q1-2021. A sharp rally in late September and early October has propelled natural gas prices well above $2.50/MMBtu and shifted portions of the forward curve above $3.00/MMBtu.

Figure 2 Natural Gas forward curve via Direct Swap

These new pricing dynamics are a result of the following recent shifts in the market:

  • Seasonal demand growth in the winter compounded by an increasingly colder forecast.
  • Hurricane disruptions have impacted overall production, and sub $40.00 crude oil will pressure mixed oil and gas producers, thus further cutting production.
  • LNG exports are projected to increase in tandem with domestic demand.

The natural gas market has dramatically shifted from Q3—even inventories in the Waha region have shifted from over-supply to deficit—and presents a unique opportunity for producers to hedge forward production as profitable levels—and Direct Swap’s platform can help!

The Direct Swap’s new Hedge Analytics module, specifically designed for oil and gas producers, gives users the ability to perform different types of analysis on their hedge portfolio, and develop actionable insights to help them make strategic decisions based on the evolving market.

Figure 3 Direct Swap Analytics Dashboard

Figure 4 Direct Swap Hedge Analytics

Our intuitive dashboard quickly allows producers to see their hedges, lender requirements and instrument breakdown. Intuitive overlays allow the compilation and graphing of existing hedge profiles, volumetric production forecasts and associated costs, to forecast profit margins across the curve. Hedges of multiple instrument types can be aggregated and compared against market-data and forward curves, to highlight effectiveness and exposure.

Direct Swap looks forward to continuing to provide our E&P clients with an expanding suite of tools to optimize their hedging activities, as hedging only becomes more important in the current environment. For those that have not already done so, please reach out to sales@tellusmarkets.com to schedule a demo of our comprehensive electronic hedging platform.

Dec 7, 2020