Why are natural gas prices collapsing?

Reducing low storage levels, natural gas prices continued to fall.

The United States entered this winter with a supply of natural gas at its lowest level in 15 years. Low levels of stored gas, just before the peak season of winter demand, have propelled prices to the highest level in the past four years. A cold snap in November resulted in a rise of about 30% in a week, an increase so fast and so fast that it forced at least one trading company to close down. By mid-November, prices had risen to $ 4.80 / MMBtu.

Worryingly, the rest of the winter was yet to come. Stored gas inventories have reached their lowest level in a decade and a half, and demand has been steadily increasing year by year as gas plants replace coal plants. The surge in LNG and petrochemical exports was also a new source of demand that did not exist in its current form only a few years ago. To top it off, several waves of extreme cold swept the North American continent, forcing millions of people to heat.

Yet despite this backdrop, prices fell shockingly quickly enough. A few weeks after the price spike in November, Henry Hub's spot prices fell below $ 4 / MMBtu. In February, prices had fallen below $ 3 / MMBtu and remained there, with the market anticipating the end of the winter demand season. Now, with rising temperatures, prices have recently fallen to $ 2.50 / MMBtu.

However, the fall in prices occurs even though the storage remains remarkably small. Natural gas inventories stood at 1247 billion cubic feet on April 12. Remarkably, despite the strong 92 billion cubic feet increase over the previous week, gas inventories remained 414 billion cubic feet below the five-year average, as well as several years. Low for the time of the year.

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The answer is largely based on record production levels as production continues to increase steadily. Analysts and gas traders have largely ignored the low levels of storage, waiting for the "season of injections" – the months of April to November, when demand is seasonal – to fill up quickly thus restoring depleted stocks.

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"It's a very bad development here" for gas futures, said Bob Yawger, head of the futures division at Mizuho Securities USA, in an interview with Bloomberg. "It's below the multi-year minimum and we're in a no-man's land right now."

He added, "We produce a lot of gas in this country," adding that "the storage is actually quite late compared to last year, but you can have as much gas as you want and as soon as you want. That's what kills the market. "

The Marcellus and Utica shales (clbadified by the EIA in the "Appalachian Region") continue to empty the country's largest amount of gas, producing more than 30,000 million cubic feet per day. According to the EIA's drilling productivity report, production is expected to increase by 353 million cubic feet per day in May.

The Permian also adds huge volumes of new supplies, a byproduct of the frenzy of oil drilling. The Permian is now the second largest producer of American shale gas. It is expected to exceed 14,000 cubic feet per day next month.

However, much of the Permian natural gas emits smoke because there is not enough pipeline capacity to get all the gas to the market.

The superabundance of gas in the Permian has become so acute that prices have recently collapsed in depth. The state has relatively lax standards for flaring, allowing producers to simply burn gas they can not capture. Permian drillers burned gas at the torch at the rate equivalent to total residential demand in the state of Texas at the end of 2018, according to Bloomberg. Admittedly, the volumes of gas in the air have increased since then.

Nevertheless, with record gas supplies from the Permian and Marcellus, as well as the revitalization of the Haynesville shale, the United States continues to set new records for gas production. This means that prices are unlikely to increase significantly in the short term.

By Nick Cunningham from Oilprice.com

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