What was once considered a useless byproduct of crude oil production, natural gas has turned into a vital energy source as nations transition to the so-called bridge fuel. Like everything else in this economy, the commodity has fallen victim to the Coronavirus pandemic. Since crude prices crashed to below zero for the first time in its history in April, analysts have been pondering if natural gas could suffer the same fate in the coming months. Will prices slump to negative territory? Look at the data.
A Case of Supply and Demand
Over the last five years, U.S. natural gas production has skyrocketed as companies took advantage of prices that peaked at about $6. In 2019, output topped 100 billion cubic feet, and it looked like it was only going to climb higher due to enormous global demand. But then COVID-19 happened, triggering an international supply glut and an immense North American and European supply build.
Recently, two reports were published that offered some insight into the state of natural gas today.
The first was the Energy Information Administration’s (EIA) weekly stockpile reading that showed an increase of 93 billion cubic feet in domestic inventories for the week ending June 5. This brought the total level of stockpiles to 2.807 trillion cubic feet, up 748 billion cubic feet from last year, and 421 billion cubic feet above the five-year average. The EIA is also predicting a 16% decrease in output.
The second was an assessment from the International Energy Agency (IEA). It forecast that worldwide consumption would plunge 4% this year, more than double the last significant drop during the 2008 financial crisis. This would represent the largest decline since the prevalence of natural gas in the second half of the 20th century. The IEA also lowered its global demand projection for 2025, from 1.8% to 1.5%. Fatih Birol, the IEA’s executive director, summarized the situation in the report:
“The record decline this year represents a dramatic change of circumstances for an industry that had become used to strong increases in demand. The Covid-19 crisis will have a lasting impact on future market developments, dampening growth rates and increasing uncertainties.”
America’s energy giants are slowly adapting to the situation. The Baker Hughes natural gas rig count has slipped below 80, while U.S. firms are curtailing operations and laying off thousands of workers. But it could take longer than expected to rebalance the market since it is estimated to be oversupplied by 20% under current conditions. But do not be dismayed. There is plenty of hope due to economies reopening, hotter temperatures, and higher electricity generation.
Subzero or Hot Air?
The $64,000 question – or is it -$64,000? – is if natural gas prices could mirror crude oil from April and nosedive below zero. This specter hangs over the industry, but could it happen?
Last month, the sector got a taste of what it would be like in this economy. The next-day natural gas prices at the Waha Hub in the Permian basin in West Texas slumped below zero for the second time in a month. Producers and investors are now waiting with bated breath to see if it could explode industrywide.
At the beginning of May, the billionaire chairman of China’s ENN Energy warned that prices could turn negative because of maximizing storage capacities. Wang Yuso refrained from naming any market or benchmark, but he did think these prices would be temporary.
Jonathan Stern, a senior research fellow at the Oxford Institute of Energy Studies, recently told Reuters that if natural gas prices became negative, it would be short-lived and serve as a wakeup call for suppliers. Stern believes any situation involving subzero pricing would happen before storages max out.
Not everyone is convinced. The Bank of America recently raised its natural gas price forecast for next year from $2.45 to $2.75. BofA analysts cited accelerating production cuts. Shell CEO Ben van Beurden is confident that the industry is making the necessary adjustments and that it would return to balance next year. He told Bloomberg:
“We will obviously flex our investment program to be aligned with where we believe the sector will go, but the profitability of the business and the outlook of this business is going to be as good as what you saw before the pandemic.”
Year-to-date, prices are down more than 20% to around $1.75 per million British thermal units (btu).
The Comeback Kid
America’s ascent to the top of the energy food chain has been nothing short of remarkable, proving a handful of essential elements. The first is that it highlights Saudi America’s ingenuity – spotlighting the power of the free market. The second is that it shows what happens when the federal government moves even one step out the door. Thirdly, the peak oil crowd keeps getting it wrong. The final benefit is that it triggered the militant climate alarmists who only want wind farms and solar power. Natural gas behaves in a cyclical pattern like other commodities. Prices are down now, but they will inevitably make a comeback and help pad the bottom line for producers and investors alike. As more markets transition to this fuel, natural gas will be supreme again.
Read more from Andrew Moran.