Natural Gas Prices: Taking Apart the Supply Nut
Written by Catherine Elder
One of our previous posts explored the impact of low winter demand on natural gas prices. This one looks at the other side of the equation: natural gas supply.
Excess supply is very much a factor contributing to this spring’s low price environment. Figure 1 shows production increasing year by year. After bobbling around 20 Tcf per year from roughly 1973 to 2009, hydraulic fracturing and its friend horizonal drilling allowed a dramatic increase in U.S. natural gas production. That dramatic increase has allowed record-breaking production. And with it, we began exporting the gas we did not need domestically. (These exports largely occur in liquified form – LNG – and support foreign policy goals as well.) The red line shows 2023’s U.S. consumption at about 32.5 Tcf, leaving a significant portion of U.S. production excess to requirements and available for export. We’ll come back to LNG in a moment.
A key factor driving supply and drilling to produce that supply is oil, and the price of oil. Natural gas and crude oil are both hydrocarbons. Oil can be processed into many more things than gas and therefore remains the more highly sought after of the two fuels. It is also generally more valuable than gas: with roughly 6 MMBtu in a barrel of oil, an oil price of $70 per barrel implies a value of $11.68 per MMBtu. These higher oil prices encourage drilling. While that drilling is aimed largely at finding oil, many of the resulting wells produce both oil and gas, accounting for a fair chunk of the increase in U.S. natural gas production.
Disruptions to supply do that, too. And so do disruptions to those LNG exports. Look at Figure 2, which gives LNG exports by month going back to January 2009. They remain minimal until 2016, when export terminals sited largely around the U.S. Gulf Coast complete construction and begin service. Big drops in those exports due the COVID lockdowns and even February 2021’s Storm Uri are evident. We can identify smaller but important drops in June 2022, when the Freeport LNG export terminal suffered a fire and was out of service for several months. Another export terminal outage occurred this January … right when demand was low due to the warm winter.
Figure 3 shares another glimpse of U.S. LNG exports relative to production. The total height of the two areas combined is total marketed production (our choice of marketed production versus dry gas production was arbitrary -- we could have used either). So of total production of 41 Tcf, about 4.3 Tcf was exported as LNG in 2023, or just over 10%. And if you prefer, that’s 113 Billion cubic feet per day marketed production and 12 Bcf of LNG export.
The third factor is storage inventory. The storage inventory data reported every Thursday is one of the most closely-watched metrics in the natural gas industry, and prices often move in response to release of that data. An increase in inventory that cannot be explained by low heating degree days, for example, are deemed to demonstrate supply is excess, and vice versa. Storage inventory is important because production is relatively constant over the year. Demand, however, peaks in winter. Without storage inventory, all winter-month demand for natural gas could not be met. Winter 2023-2024 started with inventory at 98% of maximum capacity. With the combination of low winter demand, high production and the LNG export outage less gas was withdrawn from storage this winter than usual. Now that we enter the spring “shoulder season,” inventory remains far higher at this time in the season than in any of the last five years – and 40% more than average.
When will prices rise? When one of these driving factors changes the balance between supply and demand. Notably, weather and facility outages, let alone geopolitical events that push oil prices higher, are not predictable at the granularity to predict price changes. Their impact depends on their timing and magnitude, or severity, and on what other conditions are at play simultaneously. And this is why, if you are price-sensitive, you should hedge at least a part of your purchase portfolio.