Natural gas briefly jumped past $8.00/Mcf on Monday and closed at $6.85 on Wednesday—prices that defied the expectation of the experts at the start of the year.
“It has passed all our expectations if you asked us a few months ago,” said Chris Louney, vice president of global commodity strategy at RBC. As for where it is going, during an interview on Bloomberg TV he described the US benchmark price as at “unsustainable levels.”
He expects the price to slip back to the $4.47/Mcf average they had predicted back then before a cold April in major gas markets and other unlikely events transformed the market.
On the other side of this market are those who see high prices justified by a scenario where the US repeats the mistakes of Europe, which went into last winter’s heating season with low inventories, then saw prices spike when gas flows from Russia were down 25%. That pushed gas prices to absurdly high levels, which are only beginning to fall in April.
On top of all that, Russia invaded Ukraine and forced Europeans to find a way to replace Russian gas imports, creating a market for all the LNG that US producers can ship.
“The US is starting to potentially look like Europe at this time last year, crushing the near-term seasonality and switching the curve to a constant demand scenario,” said Campbell Faulkner, a senior vice president for OTC Global Holdings, in a CNBC story.
In that market view, the usual price slumps that occur during the warmer months are likely to be absent this year, which matches the prices ahead according to futures trading. Gas futures contracts for delivery through February 2023 are priced around $7.00/Mcf in trading on the Chicago Mercantile Exchange.
But those prices can go down as fast as they went up if the US follows a different path, which seems likely for a lot of reasons.
A common feature noted in Europe and the US is low gas inventories. The US is ending the heating season—winter is over, but the cold weather has lingered—with gas in storage at the lowest level since 2019. It is 17% below the 5-year average, according to the US Energy Information Administration.
“This is at the low end but by no means outside the historical realm in recent years. At some time this year it will return to more reasonable levels,” Louney said.
While Europe was depending on Russia for gas, the US is one of the world’s top gas producers, and oil and gas companies are reacting to higher prices by pushing up production.
Back to Drilling
Responses by producers and politicians should increase supplies, but it is hard to say how much.
The number of drilling rigs and fracturing spreads working is up significantly since the start of the year—Baker Hughes reported 18% more rigs are working and Primary Vision reported 15% more spreads. The number of rigs drilling in gas-only fields is up 35% during the same period.
Those percentages reflect the depressed levels of drilling a year ago, and it is too soon to say if that added activity will change previous predictions of modest gains in gas production for the year.
Another assumption in the steady high-price scenario is that like European counties, US political leaders are so focused on the transition to non-fossil sources of energy, they will not encourage the policies needed to push up gas output.
A year ago, President Joe Biden and others were focused on priorities such as ending drilling on federally owned land. Now, the federal government is planning a lease sale for onshore drilling rights.
The transition is still moving forward, but political leaders in Washington, DC, are focused on responding to voters angry about higher oil and gas prices. Maintaining a unified front against Russia requires a large increase in LNG shipments to Europe to support its phaseout of Russian gas.
“Geopolitics are part of gas markets in a way they were not before,” Louney said.
Those concerns are likely to speed the growth of US exports. Regulators in the US and Europe are responding to the crisis by approving permits to build more facilities to liquefy gas for export in the US and regasify it in Europe.
That will create a more interconnected global market over the longer term. Over the next year, though, its impact will be limited by the fact that US LNG facilities are operating near capacity and approved expansion projects will take years to build.
This is “not something that will change overnight,” Louney said.
Getting More Productive?
There are early signs that US producers will be producing more gas, both in gas-only plays like the Marcellus and Haynesville, as well as in the Permian where gas produced with oil makes it the second-largest US gas play.
Still, no one is talking of booming production ahead. One explanation offered is oil companies are responding to investor demands to focus on maximizing cash flow rather than growth.
And the number of units working is still low compared to past booms, but those numbers may not be a good measure of productivity. Production gains could be magnified by advances in drilling and completions such as rigs so fast that 3-mile-long laterals are a cost-saving option and simultaneous fracturing that allows two wells to be treated at once. Improved designs for wells and completions may also yield dividends.
On the other side, the number of wells drilled to add production will be higher because the number of drilled but uncompleted wells (DUCs) has shrunk, and service providers say the cost of refurbishing idle equipment will need to be paid by operators.
Still, with the surge in oil and gas prices, the price of growth in shale plays which allow quick production increases would seem compatible with delivering the results investors demand.
