Gas Demand Growth Sparks Optimism Despite Supply Challenges

A recent research note from Wells Fargo has indicated a positive outlook for natural gas demand, despite potential challenges stemming from strong supply growth. Analysts believe that a slowdown in the Permian Basin could serve as a catalyst for a more optimistic long-term price forecast for natural gas. Their perspective on the U.S. gas exploration and production sector continues to be favorable, with recommendations for overweight positions in companies like Antero Resources and Coterra Energy.

This optimistic outlook is grounded in the expectation that reduced capital expenditures and lower activity in gas production will help rebalance supply and demand, alongside a multi-year expansion of liquefied natural gas (LNG) exports. Furthermore, analysts have revised their price projections through 2030 to better align with improving market fundamentals and the rising demand driven by artificial intelligence and data centers. They anticipate a transition in the U.S. gas market from oversupply in 2023 and 2024 to a period of undersupply between 2025 and 2027.

Despite the ongoing growth in U.S. natural gas supply and demand since the onset of the shale gas era, LNG exports are expected to make up the largest portion of future demand growth. On the supply side, the Marcellus and Haynesville shale formations, along with associated gas production from the Permian Basin, are identified as the fastest-growing contributors.

However, Wells Fargo’s analysts caution about several potential risks. These include the possibility of a recession affecting energy consumption and commodity prices, regulatory challenges related to natural gas use, potential methane taxes and emissions regulations, weather-related disruptions, and the impact of tropical storms on the Gulf Coast region, especially given the significant growth of the LNG export industry along the coasts of Texas and Louisiana.