US natural gas prices are at their lowest in nearly three decades as the country prepares for its warmest winter ever, which will reduce demand while production reaches record levels.
Analysts said that this winter, the months when gas demand is at its highest, will be one of the mildest on record since reliable records began dating back to 1950.
Prices have plummeted by over 50% since mid-January, largely due to the surge in US gas production. In December, it reached a new record of 105 billion cubic feet per day.
Henry Hub benchmark contracts for March were settled on Friday at $1.61/mn British Thermal Units, a slight increase from the $1.58/mn Btu that was set on Thursday. Except for a few days in mid-2021, when the Covid-19 epidemic slowed demand, this is the lowest price of the month-ahead contracts since 1995.
“It is just nuts” . . Matt Rogers, of the Commodity Weather Group consultancy, said that something unusual was happening. “I don’t want to use the term devastating, but demand expectations have really dropped.”
Climate change is causing increasingly warmer winters around the globe. This month, data released showed that the global average temperature for the very first time exceeded the benchmark of 1.5Cabove the pre-industrial level over a 12 month period.
That has undermined demand for heating fuel, even as a shift away from coal pushes up the use of gas in electricity.
According to the US Energy Information Administration, the number of heating degrees days — a measure for coldness based upon how often temperatures drop below a specific reference point — has decreased by 7 percent over the last two decades.
The US National Oceanic and Atmospheric Administration (NOAA), the government agency in charge of mapping weather trends, has warned this week, that the ice cover on the Great Lakes is at a historic low.
Analysts believe that based on the data available to date, the December-February period this year will be the hottest since reliable tracking devices were installed in US airports during the 1950s. CWG predicts it will be 3% warmer than the 2015-16 record, based upon gas-weighted heat degree days.
US gas production has reached new heights. It has been soaring since the start of the shale boom 15 years ago. S&P Global Commodity Insights estimated that the production reached a record high of over 105bn cu ft per day in December. In January, production dropped before returning to 105bn cubic feet per day in early February.
Luke Larsen is the director of S&P’s research and he said that the collapse in gas prices was due to the weather, as well as the record production levels. He also noted that gas producers will soon be forced to reduce output.
He said: “I believe we will probably have some production issues if we continue to operate at this level.” “We may very well see production shutdowns.”
In recent days, a few gas producers have announced plans to reduce drilling programmes due to the low prices that are putting pressure on their margins.
Comstock Resources announced that it would reduce its field rigs from seven to five, and suspend dividend payments until prices increase. Antero Resources reduced its rig count from three to only two, and cut the exploration budget.
EQT, the largest producer in the country, has said that it is ready to reduce its production this year as necessary, depending on what happens with prices.
Toby Rice told analysts that “activity reduction will be a major thing” in the short-term.
According to the EIA, the gas glut has led to a rise in inventories. Last week, the EIA reported that storage was at 2.54tn cu ft, which is 11% higher than it was a year earlier and 16% higher than its five-year average.
In other parts of world, a lackluster demand has pushed down prices and increased storage. In Europe, Title Transfer Facility (TTF), the benchmark traded at the Intercontinental Exchange, has dropped 22 per cent in the past year, trading around €25/mn Btu, or $7.90/mn Btu. This is less than one tenth what it was during the peak of energy crisis, summer 2022.
The price of liquefied gas delivered to North-east Asia has fallen 23 percent this year according to the price reporting agency Argus. It is now trading at levels last seen 2021.
The traders believe that the imbalance between supply and demand will take some time to resolve, while the options markets suggest there is little hope of an immediate improvement in US prices.
Charlie Macnamara is the head of commodities for US Bank. He said, “I believe that the market has written off 2024 as far as any sustained rally to the upside.” “You can see that the market is starting to form an opinion about how long we will need to stay down here to solve this oversupply,” said Charlie Macnamara, head of commodities at US Bank.