U.S. energy companies are pumping so much natural gas out of the ground that prices are plummeting, and the cheap gas isn’t likely to evaporate anytime soon.
Natural-gas prices fell 5.7% Wednesday to their lowest level in over two years—good news for people who use gas to heat homes and for companies that use it to power factories.
Seth Klarman: Investors Always Need A Strategy To Guide Them
"Many investors lack a strategy that equips them to deal with a rise in volatility and declining markets," Seth Klarman told his audience in a speech at MIT in 2012. Q3 2020 hedge fund letters, conferences and more Klarman was talking about the benefits of having a strategy, such as value investing, to provide a Read More
For U.S. energy companies, however, the domestic natural-gas market is looking increasingly out of whack. Despite a 32% drop in prices last year, onshore production rose 10%, and it is expected to rise another 4% this year, according to Barclays Capital. As a result, prices are expected to remain low for at least the next couple years.
Many energy companies have shifted their focus away from natural gas to more profitable oil. Still, natural gas is often a byproduct of oil drilling, and some companies are opting to burn off the gas they find because they don’t have a way to transport it.
For example, Goodrich Petroleum Corp.—reluctantly, it says—is flaring gas from an oil well on a ranch in South Texas because a nearby pipeline is already full.
Oil production isn’t the only factor boosting natural-gas supplies. Some gas fields produce so much ethane, a valuable liquid used to make plastics, that companies will drill regardless of gas prices. In addition, some companies need to continue drilling so they don’t violate terms of leases on millions of acres of land—deals struck when gas prices were high.
Wednesday’s price drop on the New York Mercantile Exchange, to $2.77 per million British thermal units for gas delivered next month, stemmed in part from new forecasts for warmer weather in several large heating markets, including New York and Chicago.
Earlier this week, Bank of America Merrill Lynch said gas prices could drop below $2 in the fall, a level unseen since 2002. Four years ago, it sold for around $9.
Eventually, the natural-gas market is expected to correct itself, either by forcing companies to further slash gas-development budgets or by luring in new gas customers. But industry observers say that could take many months, or even years.
The current glut partly stems from the U.S. energy industry’s success with new exploration techniques—notably hydraulic fracturing of shale formations, or fracking. Shale formations full of gas keep turning up across the country, storage reservoirs are close to full and companies are now starting to try to export the excess gas.
The gas produced by oil drilling has only added to the surplus—and made it unlikely that it will end any time soon. Oil prices now top $100 a barrel, giving energy companies ample incentive to expand drilling and keeping pressure on prices consumers pay at the pump. High oil prices effectively subsidize the production of otherwise unprofitable natural gas.