Analysts: Volatility In Energy Business Is the New Normal

Expect change to be the unchanging trait of the energy industry over the next few years, Justin Carlson, chief commercial officer of East Daley Analytics, said. And expect the changes to be erratic.

Carlson said the U.S. natural gas market faced dramatic changes from growing global demand for LNG, limited storage expansions, new infrastructure and capital discipline, not to mention the weather, during East Daley’s annual webinar, ‘Dirty Little Secrets: Volatility Will Continue Until Morale Improves,’ on Dec. 13.

“What really matters today is weather,” Carlson said. “If we keep on the pace we’re at, December will break a decades-long record of where storage inventories are at this time of year.”

Warm winters lead to customers using less gas to heat. After a year of record U.S. natural gas production and a mild fall season, the U.S. Energy Information Administration reported that natural gas storage in the U.S. was 3.719 Tcf on Dec. 1, 6.7% higher than the five-year average.

East Daley predicted the price of gas would be on a yo-yo through 2027. In 2024, Carlson explained that full storage levels would cause gas prices to fall to around $2.63/MMBtu in the spring, only to shoot back up close to $4/ MMBtu by December, thanks to heavy summer demand and a growing market for LNG.

LNG demand will continue to stress the U.S. supply system into the next decade. EDA expected demand for U.S. LNG will increase by 22 Bcf/d to a total of 132 Bcf/d by 2030. Supply is expected to increase to 131.8 Bcf/d. Tier 2 basins such as the Anadarko in Oklahoma and the Texas panhandle and the Barnett in North Texas will play key roles in keeping up U.S. supply.

In the midstream market, Carlson said that competition was heating up among companies to collect the largest amount of NGL possible. Companies are using free cash flow of about $15 billion to build pipelines that will transport the chemicals out of the Permian to the Gulf Coast, as NGL export demand is rising along with LNG.

“The rush to defend territory will create an overbuild that favors the large, integrated companies,” he said.

More midstream M&A?

Carlson also gave his take on the future M&A market for midstream companies, which analysts are expecting to pick up. With a lack of new major pipeline projects to spend capex on, many midstream companies have recently focused on financial discipline and have large amounts of free cash flow. Those combined factors will have some companies looking to expand through mergers.

Other midstream companies may not be interested in immediately selling, but EDA analysts said it may be a strategically good time.

“I would say on the buyer side, let’s not get too greedy and look for opportunities to share in some long-term growth,” he said. “On the seller side, I’d also say don’t get too greedy.

“You may not realize the value that cooperation has in feeding, driving synergies to feed volumes through the full value chain and ultimately have even bigger growth.”