The oil price crash has attracted all the media attention to the dire state of the U.S. crude oil-producing sector with cash-strapped drillers struggling to make any money at $20 oil. The collapse of the price of oil, however, could be the first step toward higher U.S. natural gas prices as early as next winter, helping the gas-oriented shale firms who survive the next few months to have their gas selling for more than double the current rates.
The U.S. natural gas industry is set to suffer a lot in the short term, but the medium-term gain could be around the corner after the short-term pain, analysts say. The American natural gas market could be yet another example of the saying that ‘the cure for low prices is low prices.’
On Thursday, the benchmark price of natural gas at the Henry Hub closed at $1.733 per million British thermal units (MMBtu), down by 2.8 percent on the day. Earlier in April, the price had dropped to as low as $1.552/MMBtu.
Earlier this year, warmer winter weather reduced U.S. natural gas demand for heating, and as production growth continued to exceed demand growth, U.S. natural gas prices slumped in February to their lowest February levels in two decades.
But in February and in March, the world was shaken by the coronavirus pandemic, which resulted in the (temporary) end of the three-year-long Saudi-Russian partnership to bolster oil prices, and which sent oil prices crashing amid massive demand loss.
The U.S. shale patch reacted within days to the price crash, announcing spending cuts across the board. From ExxonMobil to the smaller guys, everyone started adjusting capex and production guidance to go through the price crash.
Reduced drilling, frac holidays, and collapsing rig counts are set to reduce U.S. oil production and, with it, the associated natural gas production. Gas-directed plays are also slowing production because of higher-than-average natural gas inventories and prices lower than $2/MMBtu, discouraging production increases.
In the coming months, U.S. natural gas production is expected to decline, leading to a shortage on the gas market as we enter next winter, data analytics company Enverus said in its report ‘The Dark Side of the Boom’ this week.
With the global oil glut weighing on oil prices and U.S. drillers slamming on the brakes of production, natural gas production will decline for the rest of the year, according to Enverus.
“Enverus expects dry gas production to decline by over 6 Bcf/d by December 2020 compared to 2019. This will cause the gas market to go from being long during the summer months to being very short by the winter 2020-21,’’ according to the report.
The data analytics company forecasts that natural gas prices will exceed $4/MMBtu and could reach $4.50/MMBtu as early as the coming winter. This expected sharp increase in prices from the current $1.73/MMBtu would incentivize production in the largest shale gas plays such as the Marcellus, Utica, and Haynesville.
“Longer term, natural gas prices are expected to average $2.80/MMBtu; this level allows gas production growth to meet expected demand gains,” Enverus said.
The Energy Information Administration (EIA) also expects short-term declines in U.S. natural gas production.
Historically, production tends to slow down when WTI Crude drops below $45 a barrel or the Henry Hub price falls below $2/MMBtu, EIA says, and we are seeing both these events unfolding right now.
“In addition to this model-based drop, EIA assumes a further 15% reduction in activity on average in the second quarter of 2020 and a 12% reduction in the third quarter of 2020 to account for the unprecedented effects of COVID-19 on the level of drilling activity as many producers have already announced plans to reduce capital spending and drilling levels,” the EIA said in its April Short-Term Energy Outlook (STEO) this week.
Dry natural gas production is expected to average 91.7 Bcf/d this year, down from record 92.2 Bcf/d in 2019, with monthly production falling from an estimated 94.4 Bcf/d in March to 87.5 Bcf/d in December, the EIA says. Natural gas output will drop the most in the Appalachian region because of low natural gas prices and in the Permian region, where low oil prices force producers to cut production, thus reducing associated gas output from oil-directed wells, according to EIA’s estimates.
Although this year’s natural gas production is expected to decline, come next winter season, the short-term pain could turn to a medium-term gain for those producers in the U.S. natural gas market who will have survived the current shale bloodbath.
By Tsvetana Paraskova for Oilprice.com
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