Natural Gas: How Low Can It Go?

The price of natural gas has slumped to a four-year low. And it shows little sign of recovering anytime soon.

How cheap are we talking? Gas futures recently traded at $1.90 per million British thermal units, versus about $3 per MMBtu at this time last year. Prior to the ramp up in domestic production unleashed by hydraulic fracturing, gas routinely traded above $5 or even $10 per MMBtu. (And that’s not accounting for inflation.)

U.S. gas consumption is higher than ever, thanks to strong demand from gas-burning power plants as utilities shut down coal-fired plants. And energy companies are exporting a record amount of the stuff, both via pipelines to Mexico and in liquefied form to buyers all over the world. Yet all that demand hasn’t been enough to prevent an epic price rout, because gas production has grown even faster.

Why do energy companies keep producing more gas when its price keeps dropping? In many cases, they can’t help it. A sizable portion of America’s gas output is the byproduct of oil wells in places like the Permian Basin of Texas and New Mexico. Gas that comes up with the oil is routinely sold off for cheap, if not simply burned off at the well site. And although oil drilling activity has declined lately because of cheaper crude, it’s still going fairly strong.

Much of the recent gas price decline owes to unseasonably warm weather across large swaths of the U.S., which has kept heating demand lower than normal. Stockpiles of gas in underground storage are high for this time of year, and weather forecasts aren’t showing any severe cold outbreaks powerful enough to put a dent in those supplies. Spring isn’t far away, which means the current glut could grow even worse if the current warm trend doesn’t end soon. Plus winter is proving relatively mild in other big gas markets, such as Europe and Asia. So international benchmark prices for liquefied natural gas are also falling. Hence the U.S. price sell-off, say analysts at S&P Global Platts.

All of this is bad news for gas producers, from the diversified oil and gas “majors” such as ExxonMobil and Chevron, to more gas-focused companies, such as Antero Resources and EQT. Exxon, in its third-quarter earnings call, noted that “natural gas prices…remained challenged by market imbalances.” That’s putting it mildly. No wonder that the shares of energy companies have lagged so badly behind most of the rest of the stock market lately.

Of course, gas producers’ pain is consumers’ gain. But it depends on which consumers you’re talking about. According to data from the Department of Energy, commercial and industrial customers mostly paid less for gas in 2019 than they did during the comparable periods of 2018. (The DOE hasn’t tabulated full-year price data yet.) Ditto for electric utilities, even as gas-fired power plants continue to displace coal plants. But residential customers haven’t been benefiting yet. Through the first 10 months of 2019, the average residential price was a tad higher than it was a year earlier.

Natural gas prices are notoriously volatile in the short term. In the long term, it seems reasonable to believe that rising domestic consumption plus growing exports should bring demand into better balance with supply, giving prices a boost. But investors looking for a sustained price rebound are probably in for a long wait.