What is the impact of DeepSeek AI on US gas price outlook - Mizuho

Published 28/01/2025, 16:38
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Investing.com -- Shares of US gas exploration and production (E&P) companies saw a significant drop on Monday, approximately 6.3%, after Chinese AI startup DeepSeek introduced its R1 model, which outperforms US counterparts at a fraction of the cost.

R1 reportedly delivers performance comparable to leading-edge chips with about 50% less power consumption.

But despite this development and a broader market sell-off, analysts at Mizuho (NYSE:MFG) have left their outlook for natural gas prices unchanged, viewing the market reaction as excessive.

DeepSeek’s announcement over the weekend highlighted the R1 model’s efficient power usage, which could potentially halve the power requirements for AI data centers. This news coincided with a decline in stock prices for AI technology leaders like Nvidia (NASDAQ:NVDA), which fell around 17% on Monday.

However, Mizuho’s analysis suggests that the growth in power generation for AI data centers is only one element of the broader demand for US natural gas.

According to Mizuho, the expected growth in demand for US natural gas between 2023 and 2028 is not solely dependent on AI data centers, which account for approximately 11% of the total expected increase.

A larger portion, about 38%, is projected to come from LNG export growth, with another 26% attributed to broader electrification trends such as coal retirements, electric vehicle adoption, and industrial onshoring.

“Furthermore, US gas companies are currently setting their capital plans for 2025 - and unlikely to lean into growth spending given uncertainty of prices,” Mizuho continued.

“A total cycle time of ~270 days from spud to first production means the longer E&Ps delay adding rig activity, the tighter the market will continue to get, especially if non-AI data-center demand continues to be strong.”

The investment bank also highlighted recent sector consolidation, with public operators controlling a more significant portion of US gas production in the fourth quarter of 2024 compared to the fourth quarter of 2022. This shift could diminish the impact of private operators on short-term supply.

Moreover, the firm pointed out that President Trump has made global leadership in AI a key part of his agenda.

“Acceleration of AI deployment favors gas-red power generation, in our opinion, given time-to-market vs. other sources, especially coupled with a more supportive regulatory environment,” it added.

Despite the immediate reaction to DeepSeek’s announcement, Mizuho observes that longer-term gas futures remained relatively stable, with the 2027-28 strip seeing a minor change.

The firm maintains its natural gas price outlook, which is still below the market strip for 2025 and 2026. Mizuho continues to support natural gas-focused E&Ps and highlights Outperform-rated companies such as EQT Corporation (NYSE:EQT), Expand Energy Corp (NASDAQ:EXE), Range Resources Corp (NYSE:RRC), Coterra Energy Inc (NYSE:CTRA), and BKV Corp (NYSE:BKV) in their coverage.

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