Natural Gas Prices on the Verge of Dropping Below Key Threshold

Natural gas prices have experienced a significant decrease of 40% over the past three months, bringing them dangerously close to falling below a crucial price threshold for the first time since April.

Weather Impacting Natural Gas Prices

What makes this price drop rare is that it can be attributed to weather conditions. Natural gas, predominantly used for electricity generation and heating, has been affected by an unusually warm winter, apart from a brief period of extreme cold temperatures in January.

Warmer February Ahead

According to the National Weather Service, February is expected to be warmer than usual across most parts of the United States. This can be attributed to the El Niño weather pattern, which has brought warmer temperatures to a significant portion of the country. El Niño is characterized by warmer water in the Pacific Ocean, which impacts the winds across the U.S., resulting in increased temperatures.

Roth MKM analyst Leo Mariani emphasized the significance of weather conditions on natural gas demand in his note, stating, “February marks the heart of winter, and it is the second most important month of the year for natural gas demand. Weather can be a big swing factor for natural gas prices as it can move natural gas storage levels significantly.”

Other Factors Contributing to Price Decline

While weather plays a significant role, there are also structural reasons behind the decline in natural gas prices. The overall production levels of natural gas in the U.S. continue to rise, surpassing the demand. Additionally, natural gas storage levels are currently 5% higher than normal for this time of year, further pressuring prices.

As natural gas prices teeter on the edge of this key threshold, investors and industry experts remain watchful of both weather patterns and production levels as two critical factors that will continue to impact prices in the coming months.

The Natural Gas Industry Faces Structural Challenges

The natural gas industry is currently grappling with a significant structural problem that could have lasting effects on prices. While natural gas producers have made efforts to curb production, reducing the number of rigs utilized by 20% in the past year, there is a key factor that continues to drive up production levels – associated gas.

Associated gas, which is a byproduct of oil drilling, has become increasingly prevalent and now accounts for 15% of the market in 2022, up from just 6% in 2010. Experts predict that it could make up an average of 20% of production through 2050, according to the Energy Information Administration.

Despite this challenge, there are other positive developments on the horizon for natural gas producers. One promising trend is the anticipated growth in overseas gas exports, particularly in the form of liquefied natural gas (LNG). It is projected that LNG export capacity will expand by 85% over the next four years, leading to increased demand for U.S. gas and potentially higher prices.

However, there is some uncertainty regarding LNG growth beyond 2028 due to a recent decision by the Biden administration to halt the approval of new export terminals. Nevertheless, the industry still has significant growth potential, as evidenced by the fact that natural gas producers have not been as severely impacted by the drop in prices as the commodity itself. For instance, industry-leader EQT’s shares have only declined by 18% since natural gas prices peaked, compared to the 40% decrease in futures prices. Chesapeake Energy has seen a more modest decline of 12%.

Furthermore, futures prices for longer-dated contracts indicate a sense of optimism within the industry. Contracts expiring in a year are currently trading at $3.76, whereas today’s prices stand at $2.06.

Overall, while the natural gas industry faces ongoing challenges, there are still reasons for cautious optimism. The industry’s ability to adapt to changing dynamics, the potential growth in LNG exports, and signs of resilience in stock performance all point to a possible rebound in the future.