Natural gas prices in the United States plunged 62% last year compared to a year earlier. Prices were driven lower by booming production, where growth substantially outpaced demand growth.
The low prices for gas stimulated a surge in U.S. LNG exports, and at home, they prompted a palpable decline in household heating bills—leaving people with a bit more money to spend on other things.
It is this last fact, as reported by the Bureau of Labor Statistics in its latest consumer price index, that, according to Bloomberg, has helped revive the U.S. economy. What’s missing is what happens when prices start climbing again. Because they will.
Lower gas prices mean lower heating bills and higher cash reserves to use on other products and services. Yet lower gas prices also mean lower fertilizer costs at some future point, which would, in turn, suggest a downward potential for some food prices.
Unfortunately, per one major fertilizer maker, CF Industries Holdings, some industry players have missed out on the price plunge because they hedged their future gas inputs, meaning the decline in prices in that industry might take a while—if gas prices stay low.
From the perspective of those worried about the economy not picking up faster, the problem is that the plunge in natural gas prices made it uneconomical to produce some of that gas. A lot of the growth in production last year came from associated gas extracted from oil wells in the Permian. For those oil operators, it costs nothing to get the gas out. For pure-play gas drillers in Appalachia and Marcellus, however, prices matter. And they are starting to cut production. Related: This Could Be A Gamechanger For Natural Gas In Europe
EQT, the largest gas producer in the country, said earlier this month that it would cut production “strategically” this month, in response to low benchmark prices. The company would shave some 1 billion cu ft from its average daily, it said, “in response to the current low natural gas price environment resulting from warm winter weather and consequent elevated storage inventories.”
The cuts had already begun in late February, with a goal of cutting a total of between 30 and 40 billion cu ft, or between 7% and 8% of EQT’s quarterly total, Bloomberg noted in a report at the time. Benchmark gas prices immediately jumped on the news, especially as Energy Aspects reported that EQT is not the only one cutting production.
Natural gas production in Appalachia, the firm said, was “starting to move lower to unwind oversupply, though early March weather forecasts show limited demand potential,” adding that “Total U.S. production is showing initial signs of weakness.”
It will be a while until the effect of this production cut begins to impact actual gas prices. Front-month futures are still trading at below $2 per million Btu. Going forward, however, Henry Hub futures quotes on CME’s platform are sharply higher, reaching $2.52 per mmBtu for August and topping $3 per mmBtu for November.
The futures market, then, seems to be pricing in the production cuts already. And drillers will continue curbing production until such time that it becomes profitable to boost it again.
In February, natural gas production in the country fell by 7%, according to a Reuters report from earlier this month. Yet prices are yet to catch up, amassing losses of over 27% over the first two months of the year. This trend may continue as the weather warms and heating demand declines. Yet sooner or later, prices will catch up with production movements. Gas bills next winter may look different from last winter’s, with all relevant implications for the broader economy.
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By Irina Slav for Oilprice.com
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