Falling Natural Gas Prices: A Warning to Producers and Investors
Natural gas prices have gotten so low that many companies are curtailing production.
Last week’s average spot price of $1.88 per million British thermal units (mmBtu) was 31 percent below the mid-June weekly average of $2.73 (Figure 1). Meanwhile, production ramped up after prices nearly doubled from the mid-March low of $1.40.
What’s even more concerning is that despite a 120 billion cubic feet (bcf) drop in comparative inventory (yellow bars) since June 14, prices have still declined (red line). This is the opposite of the usual market behavior and is occurring because supply and demand are completely out-of-balance. The market is sending producers a clear and urgent signal to stop drilling.
Spot price fell as markets signalled companies to stop drilling.
Source: EIA & Labyrinth Consulting Services, Inc.
Despite significant LNG (liquefied natural gas) and pipeline exports, the EIA (U.S. Energy Information Administration) forecasts an average spot price of just $3.27 in 2025 (Figure 2). This marks a rise from $2.30 in 2024, but only if natural gas exports increase by 1.5 bcf/d, from 14.9 to 16.4 bcf/d.
but spot price is only expected to average $2.30/mmbtu in 2024
Source: EIA STEO & Labyrinth Consulting Services, Inc.
The core issue for gas producers has been the reduced consumption during recent winters. Figure 3 illustrates degree days—a measure of energy used for heating and cooling—over the period from 2007 to the present. Since 2011, U.S. winters have generally been warmer than average, with the exceptions of 2018 and 2019.
except for the winters of 2018 and 2019.
Source: EIA STEO & Labyrinth Consulting Services, Inc.
Warmer winters have come with hotter summers, but gas consumption remains significantly higher for winter heating than summer cooling. Despite global warming altering the winter-to-summer usage ratio, about 25% more natural gas is still consumed in the U.S. during winter (Figure 4). Total consumption has increased by 40% since 2008, but producers have struggled to manage output effectively.
Source: EIA STEO & Labyrinth Consulting Services, Inc.
In an attempt to prevent prices from plummeting, they’ve rushed to offload the surplus onto foreign markets, yet this approach has not stabilized prices. For lasting success, producers need to practice the discipline they claim to uphold. Without it, I see little justification for investors to continue supporting their stock prices.
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It seems to me, the really sad part of all this is that we are wasting precious resources that will be needed by future generations.
Edward,
It’s all about stock price, not profits. The market doesn’t care about precious resources.
All the best,
Art
Art, thanks for this useful information. I have been concerned about the connection between the Ukraine war and natural gas consumption. I read that Europe still buys gas from Russia. To me, that is crazy that Europe puts money into Russia’s war chest and then sends weapons to Ukraine. Why doesn’t the US export more natural gas to Europe, so they don’t have to buy from Russia? This would help dry up Russia’s ability to finance the war. It would shorten the war and help bring peace, saving lives. Do you have any thoughts about this?
Mark,
The US is a second-tier natural gas reserve holder after Iran, Russia, Turkmentisan and Qatar. Most of what you have heard is pure industry propaganda.
All the best,
Art
No mention of associated gas? Not material?
Steven,
Gas is associated with all oil production. There’s not much difference in oil chemistry between US conventional oil and tight oil. I didn’t mention associated gas because it’s part of the package.
All the best,
Art
The natural gas industry leadership believes in drill baby drill. In spite of U.S shipments increasing basically every year for many years the NG CEO’s always manage to produce more than what is needed and prices are below where they were two decades ago. They have a rolodex of excuses that are rather comical but the unintended humor does not hide the incompetence. We need change in industry leadership.
David,
Gas company executives have a compensation package that rewards growth. It’s really that simple.
All the best,
Art