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Natural Gas Prices Could Plunge Below $2

Natural Gas Rig

So far this year, natural gas has performed the worst among major commodities, posting painful losses in January and February. It has rebounded somewhat in the last few weeks, but hovering around $3 per MMBtu, gas prices are still sharply lower compared to the fourth quarter.

Changes in seasonal temperatures are a pivotal factor for natural gas markets, and warmer winters mean weaker demand. Natural gas consumption spikes during winter months as millions of people crank up the heat, while consumption patterns descend into valleys in the spring and fall, with a smaller peak in the summer. A bout of warm weather during winter can upend gas demand forecasts.

And that is exactly what happened this year. According to NOAA, the U.S. just posted its second warmest February on record, dating back to when data collection began in the 19th century. Average temperatures were 7.3 degrees higher than average.

Heading into winter, natural gas analysts expected colder temperatures to help draw down on record high inventory levels. But it wasn’t to be. After mild temperatures swept across the continent for long stretches of February, natural gas spot prices crashed below $2.50/MMBtu by the end of the month, down more than a third compared to December highs.

The kicker was a shocking injection in natural gas storage levels in the last week of February – the first February increase in storage levels ever recorded. The surprise uptick in inventory levels threw demand projections off track, and it suggests that natural gas markets are heading back into a period of oversupply. Gas bulls might have hoped that prices would stay above $3/MMBtu and head towards $4/MMBtu, which would help gas drillers across the country, but that looks unlikely for the near- to medium-term. The unexpectedly weak drawdown season puts inventories back above long-run averages (see blue line in chart).

(Click to enlarge)

Prices have firmed up more recently as a result of a cold snap, pushing prices back to $3/MMBtu. But with winter coming to an end in the next few weeks, demand will plummet. As March comes to a close, “injection season” begins, pushing inventories back up for the rest of the year. Related: New Oil Price War Looms As The OPEC Deal Falls Short

But there are some signs that things could actually get much worse for gas markets. According to the EIA’s new Drilling Productivity Report, gas production could jump by more than 1 percent in April, with output gains coming from the Permian Basin (+154 million cubic feet/day), the Marcellus Shale (+167 mcf/d), the Haynesville Shale (+108 mcf/d) and even the Eagle Ford (+43 mcf/d). Many of these shale basins saw production decline over the past year, so a rebound is notable – and very bearish for gas prices. The combined increase of 562 mcf/d will push gas production from the top shale basins to an all-time high.

(Click to enlarge)

In fact, while there is a lot of media attention surrounding the resurgence in U.S. shale oil, with a sharp rise in rig counts and a rapid rebound in production, the side-effect of the shale comeback is an uptick in gas production. Natural gas is typically produced in conjunction with oil – when oil comes out of a well, gas comes along with it. Thus, the production of “associated gas” is set to rise substantially because of the new interest in oil drilling, not necessarily because of an enormous appetite for gas drilling. So even if prices remain low, gas production should continue to ramp up. Related: Keystone XL Does Not Make Sense Anymore

In one startling prediction, Tudor Pickering Holt & Co. believes that natural gas production in the Permian region will rise by 25 percent, a rather staggering growth rate, but considering the drilling frenzy underway there for oil, maybe that shouldn’t come as a surprise. But the spike in gas production could send prices below $2/MMBtu, Tudor Pickering analysts say. Permian gas could come on top of an expected rise in output from the Utica and Marcellus shales in Pennsylvania and Ohio, where more pipeline capacity should open up new flows of gas to mid-Atlantic and Northeast consumers.

“It’s a real risk that a year from now that prices could be below $2,” Brandon Blossman, a managing director at Tudor Pickering Holt, said in a Bloomberg interview. “You have this unfortunate confluence of Permian production ramping right into the teeth of a lot of new takeaway capacity in the Northeast.”

It was only a few months ago that predictions of $3 to $4 gas seemed like the consensus estimate, but it is not out of the realm of possibility that gas trades 50 percent lower than that in the coming year.

By Nick Cunningham of Oilprice.com

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  • Dan on March 14 2017 said:
    Who would be a fool enough to drill it at a continued loss? Better to buy a used car lot than drill n.g. The thought of rising n.g. supply due to oil production also is only based on a large enough return on n.g. to pay for the field pipeline and costs associated with laying a connection, otherwise they just burn it off and it looks like that is the answer. Under $2 doesn't pay to play, even as leftover from oil, you don't know how much you're going to get. Its not like drilling a n.g. well.
  • J on March 15 2017 said:
    This could be the worst article ever written about Nat gas. When Nat gas goes below $3 drilling stops. I.e. 2016. Nat gas production in the Permian is not profitable at these prices. So gas produced from oil wells will be flared not sold.
  • Bud on March 15 2017 said:
    Most of the east coast is digging out of a snow storm with temps in the teens and twenties. Sounds like somebody needs out of a trade. More companies will file chap 11 and many will stop drilling at below 2, problem solved. Oh, you also forgot to mention exports.
  • chris on March 15 2017 said:
    Dear oilprice.com you need to find competent author's who understand the fundamentals and don't just post sensationalistic garbage. This is getting ridiculous.
  • Mac on March 15 2017 said:
    I can't agree on the comments about flaring gas in the Permian. Associated natural gas, for the most part, tends to be relatively inexpensive to tie in to existing gas lines in the massive Permian infrastructure. So the oil gets put into tanks and hauled off. The gas might be flared for a while. But even at $2 an MCF in the field it really doesn't take much to pay for a gas meter and a mile or two (at the most) of low pressure gas line often as not laid on the surface. As in the 40's and 50's, natural gas is the today the less desireable product. But many of the Permian operators figure their rough economics with casinghead gas sales being enough to pay for the monthly operating expenses of the wells. It was true in the older days for the vertical wells, and it's true today. Associated gas from the Permian (and Eagleford) did much to keep the gas price in the tank from 2011 till today.
  • matt michalek on April 08 2017 said:
    I agree with J, when natural gas goes below $3 drilling comes to halt. History repeats itself
  • David on April 08 2017 said:
    So much for coals come back, as if.

    They will be a push to build a gas pipe line to Europe.

    Which will be the first thing to get blown up in a war

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