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Winter of discontent for US gas producers

It hasn’t felt much like winter in many parts of the US thanks to El Nino, and that has helped push natural gas prices to their lowest level in more than a decade

Henry Hub spot prices fell to $1.65 per million British thermal units (Btu) on 15 December, the lowest level in 16 years. Prices are even lower in the northern US, where the gas glut remains and the usually frigid winters have yet to arrive. In New England natural gas prices were $1.50/million Btu and in the Mid-Atlantic prices have fallen to just $0.91/million Btu.

Traders are nervous that warm weather will mean that brimming storage levels remain elevated through the end of winter. Natural gas inventories hit new heights of 4 trillion cubic feet (cf) in the weeks leading up to the cold season. And what is likely to be the warmest December on record in the US has done little to reduce those inventories.

There was 3.846 trillion cf of gas in storage on 11 December, just 34 billion cf less than a week earlier, according to the Energy Information Administration (EIA). The 34 billion cf draw down from storage was far below the five-year average for the week of 139 billion cf. That has left storage levels 16.4% higher than the same period last year, and nearly 10% higher than the five-year average. The combination of record high storage levels going into winter and much lower withdrawals than normal has driven prices lower. 

Weekly natural gas

Producers hoping for some relief from the weather could be left disappointed. The US National Weather Service says that December is on pace to be 30% warmer than normal and that warmer-than-average temperatures are likely persist in the northeast until early spring thanks to El Nino. The Weather Service also predicts a wet winter in the west, which could help hydropower levels recover after a devastating drought in California, further pushing down gas demand. Without a break in the weather, storage levels could come out of winter at very high levels, setting 2016 up to be another year of sub-$3/million Btu prices.

If there is any good news in this for producers, it is that low prices are encouraging record amounts of gas to be burned in the power sector. Natural gas surpassed coal in the power mix for the first time ever in April, and defied expectation by doing so again in July, August and September. July was a record month for gas burned in the power mix. But it hasn’t been enough to offset the fall in residential demand.

There has also been little relief on the supply side. In spite of a plunging rig count in 2015, production has remained robust, hitting record levels in July, August and September. More recently production has flattened, with small declines coming from the Marcellus and Barnett shale-gas fields in recent weeks. But it hasn’t been nearly enough to offset the surge in production that preceded it.

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