With the recent crude oil rally that brought WTI to a five-month high, it’s only fitting to have a look at what’s happening with natural gas. By the looks of it, nothing much that would make producers happy.
U.S. natural gas is selling at historically low prices, with forecasts for the near term suggesting no significant change as production continues to grow. In its latest Short-Term Energy Outlook, the EIA forecast that natural gas output this year will average 73.7 billion cubic feet daily, up by 1.4 billion cubic feet per day from last year. The Henry Hub spot benchmark price should average $3.05 per MMBtu this year and, driven by an increase in domestic consumption, rise to $3.29 per MMBtu in 2018.
That’s not a very significant increase from a producer’s perspective, but if they continue to lower production costs, it might become significant enough to spur more exports, which would, in turn, have further positive impact on prices. But how likely is this?
According to some, such as Forbes author Jude Clemente, it’s very likely. Clemente praises the oil and gas sector for becoming as mean and lean as possible, and notes how natural gas has become the leading primary energy source for power generation in the U.S. But what about exports?
According to Clemente, exports would not lead to any significant increase in prices either. He cites a 2012 research from economic consultancy NERA, updated in 2014, which said that in all 63+ scenarios studied, U.S. LNG exports would bring in economic benefits. The higher the exports, the greater the benefits, according to the consultancy. This is, of course, a logical conclusion, but it doesn’t mean that prices won’t rise substantially if exports become lucrative enough to replace some domestic sales.
This, however, is unlikely to happen in the near term. Back in 2014, when NERA updated its report, the LNG market was not as oversupplied as it is now. Today’s oversupply (with even more output coming from the massive Australian offshore LNG projects) is very likely to persist, and means that U.S. producers need to bring down their costs further if they want to start exporting at a profit.
Another thing that some industry observers might have overlooked is that the current price level is already uncomfortably low even for domestic sales, as Oilprice wrote a couple of months ago. Worse than the low prices, however, was the lack of sufficiently extensive gas transportation infrastructure that would have supported higher sales.
But let’s get back to exports. It’s exports that producers are looking at to improve their sales despite growing domestic demand. At the moment, judging by prices, production is growing much faster than demand, so exports are the natural direction to take. Asia and Europe are two obvious markets, and U.S. producers are already making inroads into these. Related: What Happens If Trump Trashes The Iran Nuclear Deal?
Poland and Lithuania this year received their first shipments of American LNG, and they have signaled they will gladly continue to buy natural gas from across the ocean to break the gas chain that, for now, ties them to their historical adversary, Russia. These two markets and the other Baltic States would be willing to pay more for U.S. gas, but let’s face it, how big exactly are these markets? The simple answer is not that big.
The markets to focus on are the Asian ones. Asia is the primary driver of LNG demand growth, but again there’s a problem. Thanks to the oversupply, Asian clients are asking for lower prices, and they’re getting them.
If things stay that way, U.S. natural gas prices won’t just stay where they are—they might even fall further. This is good news for consumers, but not so good for producers, though there is always a silver lining: Perhaps production prices could go lower, too?
By Irina Slav for Oilprice.com
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