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U.S. Natural Gas Prices Dip To Four-Year Lows


After the lowest summer gas prices since 1998, the cold weather to push U.S. natural gas prices up has simply not arrived. On January 20, prices fell below $2.00 per MMBtu for the first time since May 2016, and have stayed ~$1.92 since (Figure 1). Per Heating Degree Days, 10 of the past 11 weeks have been rated as “warmer” than normal.

Since early-December, storage withdrawals to meet heating demand have been less than half of the normal rate. After our second warmest November ever, December was 12-15% warmer than normal. In January, gas for used for heating was 20% below where it was for January 2019.

And even after our first bullish withdrawal last week ending January 31 (45% higher than normal), gas prices actually dropped. Although above expectations, the withdrawal reported today (137 Bcf) was still slightly below normal (143 Bcf).

Our gas inventory surplus is now 8% above normal and a whopping 31% above where we were this time last year. The next two withdrawals are expected to combine to average 30% below normal.

Indeed, this could be the toughest year for shale gas since the downturn of 2015.

After all, these current sunken prices are coming during the high demand winter season and record LNG feedgas demand of over 9.2 Bcf/d this month (which equates to ~10% of total U.S. gas production). The futures market is showing even more bearishness in the months ahead. December 2020 prices, for instance, are currently trading at just $2.45 or so.

For sure, the key gas market to watch this year will be U.S. gas production. Such low prices and hedging production programs starting to roll off suggest slower growth. After a 13-15% rise in 2018, and another 11-13% gain in 2019, output is expected to only slightly increase this year, perhaps another 2-4%.

Further, not expected to be contained for months still, the coronavirus outbreak is sinking oil prices, which could ultimately drag down oil production, and thus bring down associated gas production in the Permian basin in West Texas, where huge volumes of gas come along as basically a “free” byproduct of crude.

Despite not having any gas-directed rigs, the Permian now accounts for 37% of our crude supply and 18% of our gas. From January 6 to January 31, WTI oil prices plunged nearly 20% to $51.58.

Many non-Permian players like in Appalachia need natural gas prices at $2.30 or above. Coming into 2020, they already had planned CAPEX reductions of more than 50%, with perhaps even more next year.

As for our main new demand market, LNG, the coronavirus is also leading to a slow down in global economic growth and thus gas demand. Main new LNG buyer China, for instance, has been shutting down gas-devouring factories to cope.

China has now invoked a force majeure to stop taking LNG shipments. And although China recently promised to buy some $18.5 billion in U.S. energy products this year (and $33.9 billion in 2021), The Party has still not removed its 25% tariff on U.S. LNG.

With global LNG prices at 10-year lows, U.S. exports will have more trouble competing, potentially leading to more shut-ins to depress domestic prices even more.

Yet still, U.S. LNG problems are short-term.

There is massive demand for LNG globally, explaining why FERC approved over 20 Bcf/d of LNG export capacity last year. Asian gas prices at $4 are simply not sustainable, giving low U.S. gas prices a critical competitive edge over the mid- and long-term.

The U.S. Department of Energy now projects that our gas prices will stay below $3.70 through 2050. Just for reference, they averaged $6.00 in the pre-shale era days from 2000 through 2008.

Here in the U.S., gas will supply over 40% of our electricity again this summer. And the U.S. Department of Energy’s Annual Energy Outlook 2020 just projected major increases for both U.S. gas production and demand – on an annual average, a 2% rise for output versus a 1% rise for usage.

Clean, more reliable, more flexible, and low cost even in the long-term, gas will easily remain the mainstay in the U.S. power system for decades to come (Figure 2).

But make no mistake, gas (and oil) faces both regulatory and environmental risks this election year (e.g., anti-fracking efforts). The shale revolution, for instance, has really been a “private land” phenomenon, but federal lands do account for 15-20% of our gas and 20-25% of our oil.

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