- Natural gas storage capacity has not increased at the same pace as production, which has increased rapidly over the past decade.
- Adjusted for inflation, natural gas prices fell last week to their lowest level since trading in U.S. natural gas futures was introduced on the New York Mercantile Exchange in 1990.
- Until storage capacity increases, U.S. natural gas producers will continue to respond to prices by either reducing or increasing their production.
Despite the current low US prices and huge shale gas resources, there have been wild fluctuations in the futures market in recent months.
Record gas production in 2023 and one of the warmest winters in decades could send the U.S. benchmark gas price at Henry Hub to its lowest level in decades. Nevertheless, these factors have not eliminated the main risk of sudden spikes and dips. According to Wood Mackenzie, volatility will continue and even increase in the coming years – at least until the US expands its natural gas storage capacity.
Lowest gas price in decades
U.S. natural gas prices fell to about $1.55 per million British thermal units (MMBtu) earlier this month – the lowest level since 1995, excluding the Covid-induced crash in energy prices in 2020.
Adjusted for inflation, natural gas prices fell last week to their lowest level since trading in U.S. natural gas futures was introduced on the New York Mercantile Exchange in 1990.
The daily natural gas price in the Henry Hub averaged $1.50 per MMBtu on Feb. 20 – the lowest inflation-adjusted dollar price since at least 1997, according to Refinitiv Eikon data reported by the EIA. High natural gas production, low natural gas consumption and high inventory levels contributed to prices falling for much of 2023 and the first two months of 2024, the Energy Information Administration said in a note this week.
Ample supply is expected to keep the equilibrium price of natural gas in the U.S. low and rising slowly through 2050 and beyond, Ed Crooks, Wood Mackenzie's vice chairman for the Americas, wrote in an analysis last week.
Volatility risk
“But while the outlook for average gas prices remains stable, the potential for volatility around these averages has increased,” Crooks said, noting: “It is likely that price volatility will continue until U.S. gas storage capacity increases significantly becomes.” .”
Natural gas storage capacity has not increased at the same pace as production, which has increased rapidly over the past decade. As a result, producers respond to price signals by either increasing or restricting production, which has cyclically resulted in lower or higher natural gas prices, respectively.
The response to U.S. shale has been reactive – companies increased or reduced drilling and production activity depending on price, but the impact is only felt months later and is either amplified or limited by seasonal demand. Volatility inevitably follows. Extreme events such as winter storms have also led to an increase in gas prices in recent years.
The answer to increased volatility and price swings in both directions is more storage options, according to Eugene Kim, Wood Mackenzie's research director for American gas.
“This greater volatility is due to the fact that the U.S. market has grown significantly without any corresponding expansion in storage capacity,” Kim said.
“We’ve seen some companies take advantage of these price movements by investing in memory, but it’s not enough.”
However, according to WoodMac, the incentive to build additional storage capacity has been dampened in recent years as the spread between winter and summer prices has been narrow, partly due to the shale area's ability to be partially flexible and adapt to seasonal demand.
Gas producers are reducing production due to low prices
Until storage capacity increases, U.S. natural gas producers will continue to respond to prices by either reducing or increasing their production.
With current oversupply and prices at their lowest levels in decades, some of the largest gas producers have already announced they will reduce production this year.
For example, Antero Resources (NYSE:) released a drilling rig in December 2023 and a completion team in February 2024 due to low gas prices.
For its part, Comstock Resources (NYSE:) plans to reduce the number of drilling rigs it operates from seven to five.
EQT Corporation (NYSE:), currently the largest U.S. natural gas producer, lowered its production guidance earlier this year “in response to the pricing environment we find ourselves in and to ensure there is flexibility,” said CFO Jeremy Knop in its earnings release the fourth quarter in February.
“The market is not only demanding production cuts, but also reductions in activities,” said Knop.
Chesapeake Energy (NYSE:), which is on track to become the largest U.S. gas producer following its planned merger with Southwestern Energy (NYSE:), will also reduce its production in 2024.
Chesapeake plans to limit its turn-in-line number to 30 to 40 wells, with the majority already done in January and February, deploy two frac crews so that one frac crew remains in each basin, and to retire two rigs, resulting in four rigs “The Haynesville rigs will begin in March and three Marcellus rigs will begin mid-year,” CEO Nick Dell (NYSE:)'Osso said on last week's earnings call.
“The market is clearly oversupplied today,” noted Dell'Osso.
Without additional storage, producers must continue to respond to oversupplied or undersupplied markets with production adjustments.
“The cure for low prices is low prices, and the cure for volatility is volatility. Ultimately, we expect more storage to be built to compensate for the extremes. But until then, the potential for more price volatility remains,” WoodMac’s Crooks wrote .
Related: Crescent Point Energy (NYSE:) Raises Base Dividend as It Reports a Profit in the Fourth Quarter
Original post
Comments are closed.