Hyperion’s 3 year Lower 48 natural gas production forecast is assuming significant production growth from now until the end of 2027. Lower 48 natural gas production is estimated to grow to 113.5 Bcf/d by December 2027. This implies substantial growth in natural gas production, for which the forward curve for natural gas is currently high enough to incentivize when considering that the all-in cost for a new well in Haynesville Louisiana is ~$2.50 / MMBtu.
Pipeline capacity growth in Texas and Louisiana is more than substantial enough to accommodate strong production growth in both states. Strong natural gas production growth in the Lower 48 will ultimately be determined by the LNG liquefaction demand that is expected to come online from 2025-2027. At the same time, LNG liquefaction demand will be determined by the fate of the global economy. The current natural gas forward curves for the NYMEX Henry Hub, the Dutch TTF, and the Asian JKM markets are incentivizing a lot of LNG liquefaction capacity to be built in the Lower 48.
The premium spreads in Europe and Asia begin to tighten in 2027, but the spreads are still wide enough even in 2027 to bring on more liquefaction capacity in the Lower 48. The main risk factor to these spreads is a global recession causing LNG demand to drop significantly and thus canceling Lower 48 LNG liquefaction projects. The cancellation of a large amount of LNG liquefaction projects in the Lower 48 would reverberate back to US natural producers and cause their long-term production increase plans to be put on hold. Indeed, recession risks are now increasing based on 2 factors.
Increasing Recession Factors
Perhaps, the number one indicator that recession risks are rising is the Federal Reserve lowering interest rates by 50 basis points for the first time since March 2020. In previous rate cutting cycles (2001, 2007, and 2020) when the Fed began cutting interest rates by 50 basis points, recessions had always followed. A rate cutting cycle that begins with 50 basis points indicates that the Fed already sees that they are behind the curve on interest rate policy. The Fed is usually behind the curve on interest rate policy and it’s because the Fed moves slowly and incrementally. If the Fed were perfect in their interest rate policy decisions, recessions would not exist.
The second major factor indicating recession risks are rising is the inverted treasury yield curve.
An inverted treasury yield curve indicates that the Federal Reserve Bank is setting short-term interest rates too high, and that monetary policy is too tight. The US yield curve began to invert in December 2022, which means monetary policy has been potentially too tight for nearly 2 years, further indicating higher than normal recession risks.
All of this points to large economic risks to the global LNG market and to the risky assumption from US natural gas producers that there will be enough LNG liquefaction capacity to allow for significant production increases. But for the time being, the natural gas forward curves in the Lower 48 and Europe and Asia are accommodating large production increases and liquefaction capacity additions, respectively. Stay tuned!