Low Natural Gas Prices Could Cause A Supply Crunch

Earlier this month, the benchmark price for U.S. natural gas fell below $3 per million British thermal units for the first time in almost two years. Forecasts are that it will remain below $3 until at least the middle of the year.

The natural gas price drop is already forcing producers to taper production plans just as Europe begins to plan for its summer gas storage refill season when demand is expected to surge.

Since the start of the year, U.S. natural gas prices have slumped by 46 percent. The number of drilling rigs in gas-rich parts of the shale patch rose by 48 percent in the first half of 2022 but now this trend is about to reverse as oilfield service providers warn they will be moving equipment out of gas fields, Reuters reports, citing Liberty Energy and Helmerich & Payne.

The surge in drilling rig additions last year was quite understandable: a whole new LNG export mark opened up in Europe, and prices for U.S. natural gas ended up averaging $5.46 per mmBtu for the year. This was the highest price for the commodity in more than ten years, according to Reuters. Of course drillers would add rigs.

But then the warm winter that provided a much-needed break for Europe changed things. With storage sites full to the brim and demand lower than the seasonal average, Europe stopped taking so much U.S. LNG. Winter in the United States itself was, for the most part, warm, keeping domestic demand down as well. Prices, consequently, fell. But this may spell trouble for the future.

In Europe, gas prices remain highly volatile and much higher than they were before 2022. Early this month, after a substantial slump, these jumped once again on forecasts for a cold spell across much of the continent. Germany’s chief of the energy market watchdog, Klaus Mueller, once again warned Germans were saving too little gas. 

In Asia, there are signs of recovering demand, thanks largely to the lower prices at which gas is being sold. With China returning to normal after a series of Covid lockdowns last year, this demand is expected to increase even further. Yet it might not be enough to push prices to where they were last year because demand from Europe may remain lukewarm.

Related: Oil Prices Fall On Renewed Inflation Fears

The continent is ending winter with more gas in storage than it usually has at this time of the year. This is the result of Europe’s luck with the weather from November to January. And this means it would need to buy less gas to replenish that storage in the spring and summer.

According to Morgan Stanley, Europe’s higher-than-usual levels of gas in storage means that the risk of a supply gap for next winter is much lower than previously suspected. The bank’s analysts, as quoted by Bloomberg, actually expect there to be enough gas in storage in Europe to offset the drop in Russian pipeline flows and secure enough gas in storage for winter 2023/24.

Russian gas supplies to Europe this summer will be 18 billion cubic meters lower than they were last year, Morgan Stanley said, and Europe will have 29 billion cubic meters of gas in key EU members by the end of March. The figures appear to be based on Russian gas exports to Europe after the flow cuts and the sabotage of Nord Stream, which took 5 cubic meters of pipeline export capacity offline last summer.

Yet all this means that U.S. gas prices will remain lower for longer, and if prices remain lower, so will production. And if this year Europe doesn’t have last year’s luck with the weather, prices could surge once again because even the most nimble U.S. gas producer cannot respond to a sharp change in gas demand in a matter of hours.

Forecasts about U.S. gas production are already being revised dramatically. Enverus expects growth of 1.7 billion cubic feet daily this year, down from 3 billion cubic feet. The Energy Information Administration expects a lower price for U.S. natural gas this year, which also suggests lower production. Yet the EIA also forecast an 11-percent increase in U.S. LNG exports this year in its latest Short-Term Energy Outlook. It probably hinges on strong demand from Europe.

Meanwhile, traders seem to be anticipating a tighter gas market. According to Reuters, gas futures with delivery dates in early 2024 are trading at over $4 per mmBtu. This could, of course, change over the course of the year, but it does suggest some on the market are preparing to benefit from the possibility of a gas supply tightening before too long.

The upside potential, however, may be limited. The EIA noted in its STEO that it expected lower domestic gas demand from the industrial sector because of subdued activity, itself the consequence of runaway inflation.

The picture is even grimmer in Europe, where exorbitant gas prices last year prompted many businesses to curb activity and downsize. And this means that there will hardly be a repeat of last year’s gas prices situation that encouraged LNG investors to forge ahead with new capacity plans.

Source: https://oilprice.com/