One of the warmest winters on record in the United States has created a natural gas glut, dragging benchmark gas prices to their lowest levels in three decades and prompting producers, who were pumping at record rates, to scale back drilling activity.
The front-month U.S. benchmark price at the Henry Hub settled on Friday at its lowest level since 1995 – except for a few days during peak pandemic in 2020.
Record domestic natural gas production has also added to the glut, but now some of the major producers are hitting the brakes on drilling and completion activity and reducing rig numbers in response to unsustainably low natural gas prices.
Despite the constant retirement of coal-fired power capacity, demand for natural gas for electricity and space heating has been lower this winter due to the warmer-than-normal temperatures, except for a cold snap in the middle of January.
El Nino has been stronger than usual in the central and eastern Pacific this winter, leading to warmer temperatures across the United States, Reuters columnist John Kemp notes.
As a result of warmer weather, withdrawals from underground gas storage have been lower than usual, leaving stocks at a higher-than-average level for this time of year.
In the latest reporting week ending February 9, net withdrawals from storage totaled 49 Bcf, well below the five-year (2019–2023) average net withdrawals of 149 Bcf and last year's net withdrawals of 117 Bcf during the same week, per EIA data.
Working natural gas stocks totaled 2,535 Bcf, which is 16% more than the five-year average and 11% more than at this time last year. Total working gas in storage is also above the five-year historical range.
The trend of low withdrawals has been present all winter, not just in early February.
The average rate of withdrawals from storage has been 12% lower than the five-year average so far in the withdrawal season, November through March, per EIA's estimates.
If the rate of withdrawals from storage matches the five-year average of 10.9 Bcf/d for the remainder of the withdrawal season, the total inventory on March 31 would be 348 Bcf higher than the five-year average for that time of year, according to the EIA.
The high storage levels suggest that weather could be a less important factor in driving up U.S. natural gas prices until the end of the winter and withdrawal season on March 31.
Analysts and traders tell the Financial Times it would take a while for the glut to be flushed out of the market.
"You're starting to see the market really start to formulate an opinion that we need to be down here for a while to help solve this oversupply," Charlie Macnamara, head of commodities at US Bank, told FT.
Natural gas producers are already signaling they have taken steps to reduce activity and production rates in response to the glut and low prices.
Antero Resources, for example, released one drilling rig in December 2023 and released one completion crew in February 2024 as a result of the low gas prices.
The company is now down to a two-rig program from three rigs, and one completion crew.
Comstock Resources, for its part, plans to reduce the number of operating drilling rigs it is running from seven to five.
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EQT Corporation, the largest U.S. natural gas producer, lowered earlier this year its production range guidance "as a response to the price environment we're in and wanting to make sure there is flexibility," CFO Jeremy Knop told the Q4 earnings call last week.
"So EQT can respond and make sure that if price gives a signal for lower activity and in lower production, we stand ready to respond," Knop said.
"The market is asking for not only production curtailments, but also activity reductions."
By Tsvetana Paraskova for Oilprice.com
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