Natural Gas Price Drop Could Spell Doom for Producers

• U.S. natural gas prices continue to trade under $1.70 per MMBtu.
• For commodities traders, the floor is probably around $1.50.
• American gas producers have been trying to stem output for a year, but their counterparts in the oil patch have not played along.

Natural gas prices have continued to fall, with a mild winter and overproduction that has seen producers in the American shale patch attempt to dial down output only to have oil companies producing gas as a byproduct throw a spanner in the plans.  

For commodities traders, the floor is probably around $1.50, with February prices now under $1.70 per MMBtu. 

This situation prompted Chesapeake Energy in its earnings report earlier this week to announce it would reduce its drilling rigs to lower production. Natural gas futures received a bump from that move, but were still hovering in the $1.66 range on Thursday afternoon, and down over 5% on the day. 

El Niño is a key culprit, weakening trade winds and pushing warm water toward the west coast, resulting in warm weather conditions that reduce the need for natural gas for heating. 

In the mid-1990s, El Niño caused a major slump in natural gas prices that led to significant layoffs, restructurings and mergers in the industry. 

Between 1986 and 1995, there were three El Niño winters–all of which coincided with low Henry Hub prices, but also with industry restructuring, according to historical research published by Offshore Magazine in the ‘90s.  Related: Armed Group Shuts Down Libya’s Zawiya Refinery

Since the shale boom in the U.S., this has become more complicated to deal with, with purely gas producers and oil producers producing gas as a by-product not necessarily on the same page in terms of output goals. 

While Reuters points out that American gas producers have been trying to stem output for a year, their counterparts in the oil patch have not played along. Last year, Reuters reports, U.S. gas firms slashed drilling by 22%; yet, the country is expected to produce 105 billion cubic feet per day this year–an increase of 2.5 billion cubic feet per day on an annual basis. 

In 2022, the average price of natural gas in the U.S. was $6.50 per million British thermal units. This year, it’s only a fraction of that. 

But while natural gas prices have shed 75% in the U.S., the West Texas Intermediate (WTI) U.S. crude benchmark has fared much better. The average WTI price for 2022 was $94.9 per barrel. Today, it’s $78.90, reflecting a loss of less than 20%. 

The main reason for the disconnect here is because there is a cartel interfering in oil prices, while there is none for natural gas. 

Global supply cuts by OPEC producers keep oil prices in check, while U.S. oil companies who produce gas as a byproduct are “relatively insensitive to prices”, Reuters cited Northern Oil and Gas GEO Nicholas O’Grady as saying earlier this week, adding that gas producers are also hesitant to reduce output because of the attractive prospects for feeding into new LNG plants in the future. 

The natural next leap in that line of thinking is that when all these new LNG projects launch, the high volume of exports would bring U.S. inventory back down to a level that gas companies can start thinking about big profits. 

It’s a longer-term game that is also now in flux in the aftermath of the Biden administration’s pause on new LNG projects. 

By Charles Kennedy for Oilprice.com

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