US natural gas prices have plunged to a near-three-decade low as what is set to be the country’s warmest winter on record slashes demand for the heating fuel just as production surges to record levels.
Winter months, when heating demand is highest, are on track this year to be the mildest since reliable records began in 1950, analysts said, leaving gas usage much lower than expected.
Coupled with surging US gas production (which hit a record 105 billion cubic feet a day in December), this has sent prices into freefall - they have plummeted by more than 50 per cent since mid-January.
On Friday, benchmark Henry Hub contracts for March settled at $1.61 (€1.49) per million British thermal units (BTU), up marginally from $1.58/million BTU on Thursday. Apart from a handful of days in mid-2020 – when the Covid-19 pandemic crushed demand – that is the lowest closing price for the month-ahead contract since 1995.
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Sluggish demand has also depressed prices and driven up storage levels in other parts of the world. In Europe, the benchmark Title Transfer Facility (TTF) traded on the Intercontinental Exchange has fallen 22 per cent this year to trade at about €25 per megawatt hour or $7.90 million BTU – less than one-tenth of what it was at the peak of the energy crisis in summer 2022.
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“It’s just nuts… something very unusual is going on,” said Matt Rogers at the Commodity Weather Group, a consultancy. “I hate to use the word devastating – but the floor really fell out on demand expectations.”
Climate change has led to increasingly warm winters across the world. Data released this month showed the average global temperature for the first time breaching the benchmark of 1.5 degrees above pre-industrial levels 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.
The number of heating degree days – a measure of coldness based on how often temperatures fall below a certain reference point – has dropped 7 per cent over the past two decades, according to the US Energy Information Administration.
The US National Oceanic and Atmospheric Administration, the government agency responsible for mapping weather trends, warned this week that ice cover in the Great Lakes has fallen to a historical low for this time of year.
Based on available data to date, analysts reckon the latest December-to-February winter period will be the warmest since reliable tracking equipment was installed in US airports in the 1950s. CWG estimates it will be 3 per cent warmer than the previous record set in 2015-2016, based on gas-weighted heating degree days.
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Meanwhile, US gas production, which has surged since the beginning of the shale revolution 15 years ago, has scaled new heights. S&P Global Commodity Insights estimates that production rose to a record of more than 105 billion cubic feet per day in December. Output slipped in January before returning to about 105 billion cubic feet per day again in early February.
“It comes down to weather and record levels of production that we ended up the year with,” said Luke Larsen, director of research at S&P, of the price collapse, noting that gas producers would soon have to throttle back output.
“I think we’re going to probably run into some issues from a production standpoint if we do continue at this level,” he said. “We very well may see production shut-ins.”
A handful of gas producers indicated plans to curtail drilling programmes in recent days as weak prices put pressure on their profit margins.
Comstock Resources said it would cut its rigs in the field from seven to five and suspend its dividend until prices rise. Antero Resources has cut rig numbers from three to two and slashed its exploration budget.
EQT, the country’s biggest producer, said it was ready to reduce production as needed this year, depending on how prices move.
“In the short term, we need to be sensitive to the market that we’re in – activity reduction is going to be a big thing,” Toby Rice, EQT chief executive, told analysts this week.
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The gas glut has pushed up inventories, with storage sitting at about 2.54 trillion cubic feet last week, according to the EIA – 11 per cent higher than a year ago and 16 per cent higher than the five-year average.
The price of liquefied natural gas delivered to northeast Asia, assessed by price reporting agency Argus, has dropped 23 per cent this year, and is trading at levels last seen in 2021.
Traders reckon the supply/demand imbalance will take time to flush out, with options markets suggesting little chance of a significant US price improvement in the near term.
“I think the market has really written off 2024 in terms of any sustained upside rally,” said Charlie Macnamara, head of commodities at US Bank. “You’re starting to see the market really start to formulate an opinion that we need to be down here for a while to help solve this oversupply.” – Copyright The Financial Times Limited 2024
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