Marex’s US Power desk, which publishes regular market updates and analysis via the US Gas Fundamentals channel on Neon Insights, identified key points in their latest periodic report
- Natural gas producers’ confidence that current production levels are far below future needs may well be justified
- Producers are paying close attention to options market movements and may consequently take advantage of current high call skews
- Industry consolidation and improving balance sheets mean there is unlikely to be a return to “business as usual” overproduction
Over the past two years, the US power sector has witnessed a surge in interest, amid soaring energy demands for AI processing data centres and cryptocurrency use, as well as the global shift towards fossil fuel alternatives. While fossil fuels still account for around 80 per cent of US primary energy consumption, gas is competing with solar, coal, nuclear and wind as an input price for electricity generation. Keeping track of the latest, relevant market data is critical in this rapidly evolving industry.
Marex’s US Power desk helps investors seize opportunities in North America’s illiquid, non-transparent electricity generation market by acting as principal to create bespoke hedging solutions. The specialist team covers the East Coast power sector, from producers and distributors through to domestic utility companies.
The latest summary of leading US natural gas producers’ Q2 earnings by Robert Chess, Marex’s Natural Gas Specialist, is now available on the US Gas Fundamentals channel on Neon Insights. Chess notes that “the days of flooding the market with overproduction to make up for lower pricing may be over”, given industry consolidation and a general strengthening of company balance sheets.
In his view, producers’ confidence that current output levels fall far below future gas needs is likely to be justified in this improving industry and market environment. At the same time, call skews remain high in the wake of a series of major market disruptions in recent years, from Hurricane Katrina to price spikes caused by the Russia-Ukraine war. Chess suggests that producers may therefore be willing to take advantage of steep call skews and are monitoring specific options market movements closely.
In this regard, Chess does not think that gas options will follow the same trajectory as crude oil, where options often trade with a negative call/positive put skew because the market can be dominated by producer output. In the gas sector, “despite several mentions of using call skew to raise ceiling prices of hedges, many producers are shying away from being as hedged as they were in the past,” he observes.
These trends are explored in detail by Chess in his review of five leading gas producers’ Q2 earnings calls. He notes that EQT Corporation (EQT) aims to be “lowly hedged if hedged at all”, claiming that it can grow its business responsibly by at least 30 per cent over the coming years. Expand Energy Corporation (EXE) has been a more active hedger, but Chess identifies similar confidence in longer-term pricing, with the company “not overly concerned” with production levels, despite a spike in output over the summer.
The same positive mood is evident at Antero Resources Corporation (AR) and Range Resources (RRC), which have both increased their production guidance, while at EOG Resources Inc (EOG), second-quarter production came in above the mid-point of previous guidance, as expenses fell.
Overall, Chess concludes that while producers believe that current production levels are “far below future needs”, their optimism does not presage a repeat of overproduction in the “shale era”. Today’s market is different and moving fast, with new opportunities for producers and investors which did not exist before.
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