The past 12 months have been a wild ride for natural gas producers. Going into last winter, storage was near the 5-year average. And while prices were not great, they were at least near most producer’s costs and most natural gas producers were focused on how to continue to increase production. Recently, those ideas have dramatically changed. A mild winter put significant downward pressure on prices as production was strong, demand was moderate and storage inventory levels were high.

The US Energy Information Administration (EIA) and many in the energy industry were predicting a significant decrease in natural gas production through the rest of this year and into the first quarter of 2021. Some of this forecasted production decline was due to very low spot and short-term market prices for natural gas. Another significant driver of this expectation was the anticipated decline in gas coming from large crude oil reserves, such as the Permian Basin. However, the recent recovery of crude oil prices has changed this outlook.

Last month, we reported that while short-term crude prices were near 20-year lows, natural gas futures prices for the year 2021 were reaching 24-month highs. The rally in natural gas prices in 2021 was primarily driven by the fear that a slowdown in crude oil production from reserves, such as the Permian Basin, would produce less natural gas, which is a by-product of the crude oil extraction process. 

The market price for oil has been consistently bearish since global oil demand destruction conversations began in early March.  On Monday, April 20^th, that outlook manifested itself into a day that oil traders will never forget. Crude oil opened trading on Sunday evening at approximately $17 per barrel and by mid-morning, it had dropped to $10 per barrel. By mid-day, it was trading just above zero, and then it broke through into negative territory in the afternoon.  Crude oil settled for the day at -$37.63, up just a few dollars from the daily low of -$40.32 per barrel.

On Sunday, March 8^th, the NYMEX natural gas market opened at approximately $1.67/MMBtu. By the early morning hours of Marh 9^th, it dropped down to almost $1.60 and ended the day up about 9¢, at $1.78/MMBtu.  On Tuesday, March 10^th, natural gas again rallied another 16¢ to close around $1.94/MMBtu.  By Wednesday morning, the rally continued up to about $2.00/MMBtu before news around COVID-19 began to take hold, moving the market down.  These market movements are shown below in Figure 1 (note that the height of the line shows the day’s range between the minimum and maximum trade prices, the height of the bar is that day’s difference between opening and closing prices, and the color of the bar indicates if the day closed up (green) or down (red) compared to the open).

Last week, Williams Company and its partners announced that they have cancelled plans for the construction of the Constitution Pipeline.  This new 124-mile natural gas pipeline, shown in Figure 1,  would bring 650 Dth of gas per day from the Marcellus Shale to the Southern Tier of New York State.  While public opposition to this project was strong, recent favorable legal and regulatory developments suggested that the construction of the pipeline would proceed as planned.  However, Williams stated the economics of this project have recently changed in a way that there would not be a strong enough return on the company’s investment.  The unfavorable economics associated with the pipeline project are driven by a bearish natural gas market. 

It is hard to believe that natural gas traders and analysts remain bearish given current prices. But the amount of gas being produced is outpacing demand and continues to place downward pressure on prices.  This supply and demand imbalance has caused both short and long-term gas prices to tumble.   Prices for both the January 2020 contract and winter strip (Jan 2020 – Mar 2020) have dramatically fallen over the last month.   Figure 1 shows how gas prices for the January contract rallied through the fall, reaching its peak of $2.94/MMbtu on November 5^th and then settled at $2.22/MMBtu on December 9^th – a decrease of nearly 25% in four weeks.   Prices for the winter strip have followed a similar trend.   Figure 2 shows longer-term market movements in gas futures since November.  The blue bar in Figure 2 is the price for the January 2020 gas contract and calendar years 2020 through 2024 on November 5th.  The black bar shows how those same contracts were trading on December 13^th.   While the biggest decrease was in the January contract and in calendar year 2020, prices fell across all calendar years to 2024.

Natural Gas basis prices for the winter of 2019/2020 have decreased by 28% since the middle of October.  Figure 1 shows how the basis price for this winter started to rally in August, reaching its peak of $2.90/MMbtu on October 16^th.  Most believe that the strong rally was due to the TETCO natural gas pipeline explosion on August 1^st near Danville, Kentucky.  In the wake of that accident, the amount of natural gas moving through that pipeline was reduced by 15%.   The reduction in gas volumes along this major interstate pipeline, which supplies the Northeast, had a bullish impact on basis prices for this winter, which rallied through September and early October.

This week, a major milestone was reached in the natural gas market. For the first time in two years, the amount of natural gas in storage has exceeded the 5-year average. In Figure 1, the 5-year range of minimum and maximum amounts of gas in storage are shown in the area shaded in gray. The darker blue line is the 5-year average and the red line shows the amount of gas currently in storage. This chart shows that storage levels have been below the 5-year average for the last 25 months. At this time last year, the nation headed into winter with approximately 3,200 Bcf of gas in storage, roughly 15% below the 5-year average.  

In New York, natural gas is the new front in the war on climate change. While natural gas is much cleaner than coal, environmental groups argue that expanding natural gas infrastructure (building pipelines that transport gas, new gas power plants, and/or new buildings that use natural gas) will result in increases in upstream methane emissions and dampen efforts to switch to carbon free sources.  Due in part to environmental opposition, permits have not been granted for the construction of the infrastructure needed to support increased usage of natural gas.  As a result, in certain parts of the State, the natural gas infrastructure cannot support new natural gas demand.