U.S. natural gas output is on track to rise about 2% this year and next, according to government forecasts, but sharp declines in prices in recent weeks could undercut those gains, analysts and producers said.
Rising gas production from U.S. shale fields has provided low-cost fuel for domestic power, industrial and residential consumers and international exports. And with Russia’s invasion of Ukraine last year pushing prices into the stratosphere, producers kept adding drilling rigs.
A warmer-than-expected start to the winter and the cooling of exports to Europe as inventories filled has cut U.S. futures prices by more than half since November, causing drillers to reduce the number of rigs drilling for gas to their lowest since May.
“2023 is gearing up to be oversupplied by more than 5.0 bcfd(billion cubic feet per day), which justifies the downward trend in prices,” said Ryan Smith, a senior director at energy consulting firm East Daley Capital.
One billion cubic feet is enough gas to supply about five million U.S. homes for a day.
Gas futures at the Henry hub benchmark in Louisiana dropped from a recent high of $7.11 per million British thermal units (mmBtu) in mid-December to $3.51 on Friday.
That 51% price plunge over the past four weeks, the lack of enough pipeline capacity out of West Texas, and a projected decline in U.S. domestic gas consumption in 2023 and 2024 is forcing energy companies to rethink their outlook.
Production is expected to climb to 100.3 bcfd this year and 102.3 bcfd next year from a record 98.0 bcfd last year, the U.S. Energy Information Administration (EIA) said this week.
In November, shale gas producer Chesapeake Energy Corp said it would rethink how much activity it would support if gas prices fell this year to $4 per mmBtu. As prices crossed that level, Chief Executive Nick Dell’Osso told investors this month it expected to reduce activity levels at prices in the mid-to-low $3 level.
The EIA said the combination of falling domestic gas use and rising exports should keep total U.S. gas demand steady near 2022’s record high in 2023 and 2024, even as production rises.
One concern: rising production without much growth in demand could push U.S. gas storage toward peak capacity of around 4.2-4.3 trillion cubic feet by the second half of 2024, analysts at investment bank Mizuho told customers in a report this week.
“The natural gas price plunge may throttle new production gains into the back half of the year – but any effect on 2023 pricing is likely to be marginal,” said Eli Rubin, senior energy analysts at energy consulting firm EBW Analytics Group.