NatGas Soars After Chesapeake Cuts Production Outlook Amid Vicious Bear Market

With US natural gas prices crashing to lows not seen since early Covid in recent days, around $1.60 per million British thermal units, major shale producer Chesapeake Energy announced in a Tuesday earnings report that it would decrease the number of drilling rigs to reduce production this year. As a result, NatGas futures soared. 

Futures for next-month delivery jumped more than 12% to $1.77 in early afternoon trading on Wednesday.

This followed news from Chesapeake:

Chesapeake is currently operating nine rigs (five in the Haynesville and four in the Marcellus) and four frac crews (two in each basin). Given current market dynamics, the company plans to defer placing wells on production while reducing rig and completion activity. The company will drop a rig in the Haynesville and Marcellus in March and around mid-year, respectively, and a frac crew in each basin in March. These activity levels will be maintained through year end. Deferring new well production and completion activity will build short-cycle, capital efficient productive capacity which can be activated when consumer demand requires it. The company expects to drill 95 to 115 wells and place 30 to 40 wells on production in 2024.

NatGas prices have collapsed over the past year due to an unseasonably warm winter produced by El Nino, which led to sliding demand for the heating fuel, as well as shale drillers that ramped up production and left stockpiles well above average levels for this time of the year. 

"The Chesapeake news of lowering production has set the tone that natural gas prices have become too low," said Dennis Kissler, senior vice president for trading at BOK Financial Securities.

Kissler explained: "More producers could follow, which is needed to clean up excess supplies."

In a recent note, Goldman's Samantha Dart told clients: "Solving oversupply in 2024 sets the stage for a bullish 2025." She expects prices to bottom this year and trend higher into 2025. 

However, Dart added one caveat to her call: "Production remains a bearish risk to 2024 and could derail our bullish 2025 view." 

And prepare for more drillers to announce rig cuts in hopes to bottom prices.