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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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Don’t Bet On A Natural Gas Rebound

Natural gas prices are set to close out the year down by about 25 percent, and unlike crude oil, there is not a lot of confidence in a rebound.

Record levels of production and mild temperatures have left the gas market in the U.S. well-supplied. After running down to exceptionally low levels a year ago, U.S. gas inventory levels have shot back up to the five-year average in 2019. That means that the U.S. enters the peak winter demand season with plenty of gas on hand.

Major investors are pessimistic about the odds of a rebound in prices. Hedge funds and other money managers have amassed the largest net-short positions on gas futures since 2008, according to the Wall Street Journal. That means that investors and speculators are betting that prices will continue to fall.

“We’re still in an oversupplied situation,” Kent Bayazitoglu, director of market analytics at Gelber & Associates, told the WSJ. “It’s made it very difficult to sustain prices—they just keep falling and falling.”

A severe drop in temperatures across North America has not yet arrived, and the relatively mild weather forecasts have kept gas prices in the dumps. Related: Iraq’s 550,000 Bpd Oil Deal Is In Jeopardy

But the issue is broader than unexpectedly mild temperatures. The decade-long debt-fueled drilling frenzy may be coming to an end. In fact, the sharp drop in gas prices in 2019 threw the problems that have long been plaguing the shale gas industry into sharp relief. Investors have pulled their money out of sector and closed the door on new capital injections. The era of heavy spending and unprofitable drilling may be at an end.

The malaise creeping over the gas industry is forcing spending cutbacks, which is already starting to translate into a production slowdown. The EIA forecasts a decline in gas production in Appalachia by 74 million cubic feet per day in January, month-on-month. Gas production declines are also expected in the Anadarko basin in Oklahoma and in the Eagle Ford in South Texas. Overall production for the country is still expected to rise, due to associated gas output still rising in the Permian, and due to the ongoing revival in the Haynesville shale.

As a result, the industry finds itself in an odd predicament – total production is still at record levels, and may continue to climb, albeit at a slower and lower rate. At the same time there are widespread financial problems in the industry, particularly for gas-focused companies. One of the big questions regarding production is whether Texas oil drillers can keep gas output growing enough to offset the declines underway in Appalachia. Related: From Boom To Bust: Permian Shale Towns Face Exodus

Meanwhile, the supply surplus is also a global problem. Chevron’s recent announcement that it would take an $11 billion write down revealed two things: its shale gas assets in Appalachia are not as valuable as once thought, and the write down of its LNG project in Canada also reflects the souring of the global market for gas.

Asian spot prices for LNG are at their lowest on record for this time of year, falling as low as $5.65/MMBtu for January delivery. The glut is so bad that an LNG buyer in Singapore recently cancelled its order, but decided to pay for it anyway. It could take years for the supply overhang to get worked out.

But the effects of the surplus in the U.S. – already visible in the steep drop in prices – could become even more pronounced at the end of the winter. It would take an “ice age winter” to prevent a further price slide, Sid Perkins, founder and managing partner at Ion Energy Group, told the WSJ in November. If that cold snap doesn’t occur, “we’re likely going to come out of winter with much more in storage than we had a year ago, with no significant new demand coming online.”

If mild temperatures persist, U.S. natural gas prices could be flirting with sub-$2/MMBtu pretty soon.

By Nick Cunningham of Oilprice.com

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