Natural gas demand in the United States is growing. It’s growing thanks to the switch from coal to gas-fired power generation and thanks to the growth in liquefied natural gas exports. And yet this week, gas futures fell to the lowest since 2016 while spot prices slumped to the lowest in as much as two decades.
Reuters’s Scott DiSavino reports that the price slump was accompanied by gas traders building the highest number of net short positions since records began and quotes an energy consultant as saying “All the bulls are gone.”
Ominous words, no doubt. The reason the situation is turning so gloomy is a simple one: production is rising faster than demand. It’s a situation where fundamentals reassert their role as price drivers as opposed to supply and demand estimates that ultimately do not reflect reality.
Media coverage on U.S. natural gas has been anything but gloomy. A second shale revolution, a global shift from oil to gas, a sustained increase in LNG demand are all among the trends pointing to a glorious future for one of the world’s top producers. In fact, the International Energy Agency said the U.S. will become the world’s largest natural gas exporter by 2024. U.S. exports of the superchilled fuel are expected to exceed 100 billion cubic meters (bcm) in 2024, beating Qatar and Australia to the top spot.
And yet right now U.S. gas producers are suffering. In April this year, the benchmark natural gas contract at the Waha Hub slipped to a negative $9 per million British thermal units. Just a month later, the benchmark slipped into negative territory once again, at -$4.28 per mmBtu. The average price for the first five months of the year was $0.92 per mmBtu.
Negative prices are probably the worst that could happen to an industry that needs cash. Many blame the Permian. The so-called star play is crowded with oil drillers, but fracking releases associated gas along with the crude and this associated gas cannot be all flared, adding to already excessive supply and pressuring prices further. This situation has also been aggravated by the lack of sufficient pipeline capacity to take the surplus gas into storage.
