Natural gas prices have taken a drastic fall. With prices falling to a three year low of $2/MMBtu (even below in some weeks) at Henry Hub, the industry is starting to see a slight, but not yet significant decrease in production. These drops can be attributed to the lower commodity prices, surplus reserves and lowered demand.
The large natural gas storage reserves can largely be attributed to the prowess of the drillers and their underlying reservoirs. If the two didn’t work so well with each other, the United States wouldn’t face such a large surplus of natural gas. With the Marcellus just coming out of peak production and smaller fields like Utica still not in decline, it’s no wonder the surplus of natural gas is as large as it is today. The shale gas revolution is credited with boosting American production from 5 million bbl/day of total crude production in 2008 to 8.7 million bbl/day in September 2014 and to the current ~10 million bbl/day. This revolution helped supply the large reserves we now have at our doorstep.
Even declining plays are still producing considerable amounts. The Eagleford and Haynesville plays are still expected to produce close to 4.5 MM ft3/day and 11MM ft3/day respectively to the end of this year. And yet production continues despite falling rig counts in these areas. Prevailing economic conditions are preventing any new wells from being drilled and some are becoming uneconomic. Subsequently, these newly uneconomic wells are being shut-in and abandoned. Yet these developments certainly do not mean that production from these fields will halt given their vast reserves.
Even as winter approaches, a large surplus remains for the future. Demand is starting to pick up, but according to the Commodity Weather Group, is below average with many Eastern cities still experiencing above 60 degree weather. And although the pace of reserve surplus accumulation is expected to slow in the fourth quarter, it will be quite some time before a significant decline in the surplus (and a hopeful rebound in price). Some investors however, claim that these historical lows will attract the sharks to the bleeding natural gas prices and as a result, the price of natural gas will experience a summer rally.
Abroad, countries are facing different problems that may ultimately prove beneficial. The EU sees the large surplus of American natural gas as a way out of their dependence on Russian natural gas. Supplying over 20% of the European market with their gas needs, Russia has a powerful position and is not afraid to flex its muscle. The European market has expressed its qualms over energy security given the Soviet-era transit network of natural gas through Ukraine that still has remnant security issues. While one might see the natural gas surplus as trash to price, some (the EU) may find treasure in more diverse energy options.
Despite all this, oil still wins every day in this fight with natural gas. Crude oil still provides the majority of power to both developed and developing countries followed by coal and then natural gas. The world is still not yet ready to embrace natural gas with arms wide open as its main source of energy. Technology has not yet provided a more economic way of supplying the world’s demand with natural gas. Until that day comes, we will continue to see oil beat out natural gas as the predominant source of energy.