Is $2 Natural Gas the New Norm?
by Bob Shively, Enerdynamics President and Lead Facilitator
In Enerdynamics’ classes on natural gas markets, we discuss the key factors that go into determining the market price of gas:
Lately many of these factors have stacked up against natural gas sellers. The last time we saw prices persist below $2/MMBtu for weeks was in 1997.
source: www.eia.gov
Why the persistent low prices? Mostly because production has increased dramatically driven by advances in hydraulic fracturing and horizontal drilling combined with low borrowing rates.
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source: www.eia.gov
And while demand has increased too through growth in gas-fired electric generation, industrial uses, and through exports via pipeline and LNG, it hasn’t been enough to offset the fact that producers are pumping more gas into the market than the market needs. Producers had hoped that demand for exports of LNG would help hold prices higher. But global LNG markets have been soft for the last two years due to simultaneous new supply from Australia, Russia, and the U.S. Then demand experienced an abrupt fall due to the coronavirus outbreak in Asia and now Europe. Spot LNG prices in Japan fell from $5.90/MMBtu in January 2020 to $3.40 in February, and as of mid-March have fallen even lower. Indeed, Bloomberg now predicts that netbacks for LNG will be negative throughout summer 2020 meaning that U.S. gas exports may fall significantly.
Is there any hope that low gas prices will drive a demand boom that will push prices higher? Historically low prices in the U.S. have driven more gas-fired electric generation as gas displaced coal units coupled with a growth in industrial usage. Similarly in Asia and Europe, low gas prices have pushed out coal and oil electric generation.
But there are reasons to believe this year is different. Industrial demand appears highly uncertain as the world deals with the coronavirus. Indeed, many models now suggest that industrial demand may fall dramatically at least through the summer. And much of the U.S. generation fleet has already converted from coal to gas and/or renewables, meaning there is less coal to displace than in past years. So a quick price-based demand boost appears unlikely.
The key lies in what happens on the production side. With falling natural gas prices and even more dramatically falling oil prices, producers have already announced some drilling cutbacks. Many smaller producers appear to be teetering on the edge of bankruptcy. But shale gas wells may not be easy to shut-in, and producers may need to generate cash flow no matter how low the price. So we many not see production drop that quickly. Interestingly, gas traders remain optimistic that prices will began rebounding soon as indicated by the current Henry Hub futures price curve:
Are futures sending the right signal and will prices rebound this summer? Or are users simply using the futures market to lock in historically low prices now with a drop to come once they are done hedging? Will the current coronavirus shock further dampen demand? All good questions, to which no one currently knows the answers.
Get an overview of how natural gas markets work with Enerdynamics' online learning path Gas Market Dynamics. Need multiple licenses to train your workforce? Email us at info@enerdynamics.com or call 866-765-5432 ext. 700.
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