Natural Gas Futures Market’s Wild Swings Set To Continue

• Natural gas storage capacity hasn't increased at a pace with production, which has been soaring in the past decade.
• Adjusted for inflation, natural gas prices slumped last week to their lowest level since the New York Mercantile Exchange launched trade in U.S. natural gas futures in 1990.
• Until storage capacity rises, U.S. natural gas producers will continue to respond to prices by either lowering or boosting output.

Despite the currently low U.S. natural gas prices and the huge shale gas resources, the futures market has seen wild swings in recent months.

Record 2023 gas production and one of the warmest winters for decades may have sunk the U.S. benchmark gas price at Henry Hub to the lowest in decades. Still, those factors haven't removed a key risk of sudden spikes and dips. Volatility is here to stay and even increase in the coming years, according to Wood Mackenzie—at least until the U.S. expands its natural gas storage capacity.

Lowest Gas Price in Decades

U.S. natural gas prices tumbled earlier this month to around $1.55 per million British thermal units (MMBtu)—their lowest level since 1995, except for the Covid-induced crash in energy prices in 2020.

Adjusted for inflation, natural gas prices slumped last week to their lowest level since the New York Mercantile Exchange launched trade in U.S. natural gas futures in 1990.  

The Henry Hub daily natural gas price averaged $1.50 per MMBtu on February 20—the lowest price in inflation-adjusted dollars since at least 1997, according to data from Refinitiv Eikon reported by the EIA. High natural gas production, low natural gas consumption, and high inventories contributed to prices declining for much of 2023 and the first two months of 2024, the Energy Information Administration said in a note this week. Related: Crescent Point Energy Lifts Base Dividend as It Turns Profit for Q4

Abundant supply should keep the equilibrium U.S. natural gas price subdued, rising only slowly out to 2050 and beyond, Ed Crooks, Wood Mackenzie's Vice-Chair Americas, wrote in an analysis last week.

Volatility Risk

"But while the outlook for average gas prices remains stable, the potential for volatility around those averages has increased," Crooks said, noting that "It is likely that price volatility will persist until there is a substantial increase in gas storage capacity in the US."

Natural gas storage capacity hasn't increased at a pace with production, which has been soaring in the past decade. As a result, producers are responding to price signals by either boosting or limiting production, which has led—in cycles—to lower or higher natural gas prices, respectively.

The response of the U.S. shale patch has been reactive—companies ramp up or curtail drilling and production activity according to the price, but the effect is being felt months later and is either compounded or limited by seasonal demand. Inevitably, volatility follows. Extreme events such as winter storms have also led to spikes in gas prices over the past few years.

The answer to heightened volatility and price swings in both directions is more storage facilities, according to Eugene Kim, Wood Mackenzie's research director for Americas gas.

"This greater volatility is a result of the US market having expanded significantly without an equivalent expansion in storage capacity," Kim said.

"We have seen a few companies moving to take advantage of these price movements by investing in storage, but it's not enough."

Yet the incentive to build more storage capacity has been muted in recent years because the spreads between winter and summer prices have been narrow, also because of the ability of the shale patch to be partly flexible and match seasonal demand, according to WoodMac.

Gas Producers Lower Output Amid Depressed Prices

Until storage capacity rises, U.S. natural gas producers will continue to respond to prices by either lowering or boosting output.

Amid the current glut and prices at their lowest in decades, some of the top gas producers have already announced they would reduce output this year.

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. 

Comstock Resources, for its part, plans to reduce the number of operating drilling rigs it is running from seven to five.  

EQT Corporation, currently 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 in February.

"The market is asking for not only production curtailments, but also activity reductions," Knop said.

Chesapeake Energy, poised to become the top U.S. gas producer after the planned merger with Southwestern Energy, will be reducing its production in 2024, too.

Chesapeake plans to limit its "turn-in-line count to 30 to 40 wells with the majority having already occurred in January and February, drop two frac crews, leaving one frac crew in each basin and drop two rigs, resulting in four rigs in the Haynesville beginning in March and three rigs in the Marcellus beginning midyear" CEO Nick Dell'Osso said on the earnings call last week. 

"Today, the market is clearly oversupplied," Dell'Osso noted.

Without additional storage, producers are bound to continue reacting 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 get built to arbitrage away the extremes. But until then, the potential for more price volatility will remain," WoodMac's Crooks wrote.

By Tsvetana Paraskova for Oilprice.com

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