Wells Fargo: Gas demand growth fuels optimism despite supply headwinds

Investing.com  - A research note from Wells Fargo (NYSE:WFC) on Wednesday showed a clearing demand growth outlook for natural gas in the face of potential headwinds generated by robust and ongoing supply growth.

Analysts suggest that a slowdown in the Permian Basin might act as the catalyst for a more bullish long-term gas price outlook. They adopted a more positive perspective on the US gas E&P sector in December 2023 and continue to recommend overweight-rated Antero Resources Corp (NYSE:AR) and Coterra Energy Inc (NYSE:CTRA).

This positive view is based on expectations that lower gas-directed capital expenditure and activity levels will restore supply/demand balance, in conjunction with the multi-year LNG export expansion.

However, the analysts also made adjustments to their natural gas price forecast, extending it to 2030 to reflect improving fundamentals and the impact of AI/datacenter-driven demand. They see the US gas market shifting from persistent oversupply conditions in 2023/2024 to undersupply from 2025 to 2027.

Despite the steady increase in US natural gas supply and demand since the advent of the US shale gas era, the analysts note that LNG exports overwhelmingly represent the largest component of expected future demand growth.

On the supply side, the Marcellus and Haynesville shale plays, along with associated gas from the Permian, represent the fastest-growing sources of supply.

However, Wells Fargo analysts warn of potential risks. These include the possibility of a recession impacting energy consumption and commodity prices, regulatory constraints on the use of natural gas, potential methane taxes and emissions, weather-related disruptions, and the impacts of tropical storms on the Gulf Coast, particularly given the significant expansion of the LNG export industry along the Texas and Louisiana coastlines.