Will the Coronavirus Paradoxically Help Natural Gas Producers?
by Bob Shively, Enerdynamics President and Lead Facilitator
Headlines are full of the woes of the oil industry. Prices have dropped precipitously, and a predicted wave of smaller producers filing for bankruptcy has begun. With heavy debt loads and falling prices, the future looks dark. Yet paradoxically, some in the natural gas industry are expressing optimism for higher prices. It this optimism warranted?
For the first part of 2020 natural gas prices clustered around $2/MMBtu, historic lows for the winter season. These prices were driven by large increases in gas production that overwhelmed moderate demand growth. With the start of the coronavirus economic shutdown, prices fell even lower, hitting below $1.50 in early April. But then, just as oil prices fell dramatically, gas prices floated upward back toward $2. Producers focused on natural gas production became optimistic, hoping that low oil prices would push oil producers to shut-in wells, thus reducing gas supply from associated wells that produce both oil and gas. But the next week seemed less inspiring as natural gas prices floated back downward due to lack of demand and the realization that the supply excess would not change right away even if producers began shutting down wells.
But all the optimism in the gas industry is not yet lost, as the gas futures market indicates a current expectation that the supply glut will ease going forward resulting in consistently rising prices. As of May 7, futures for January 2021 sold for above $3/MMBtu.
But is such optimism justified?
In Enerdynamics’ Gas Market Dynamics seminar, we teach that gas prices at any point in time are dependent on various factors:
Gas markets currently seem to be focusing on the supply side with an assumption that gas production will be falling given a dramatic decrease in the number of rigs drilling:
But note the above EIA forecast suggests that production, while dropping a bit, will continue above levels experienced up until January of last year. And currently gas in storage is rising, indicating more supply than demand to use it. These factors suggest that prices should remain low, not increase.
The key to the hoped-for longer-term positive price will be price support from the demand side. This will largely depend on whether or not:
- the industry rebounds
- electricity demand results in increased natural gas-fired power production
- economies in Mexico, Asia, and Europe rebound and result in an increase in pipeline and LNG exports.
All these factors seem rather iffy as we wait to see the longer-term impact of coronavirus on the economy. Certainly, gas producers should wait to see what happens before deciding that good times are here again!
Do your employees need to understand gas markets? Enerdynamics offers its informative Gas Markets Dynamics program in both live virtual and online formats. Contact us at 866-765-5432 ext. 700 or email@example.com.
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