Find out why low natural gas prices are likely to persist through 2020.

We are through what is typically the coldest part of winter, yet find ourselves with Henry Hub natural gas prices below $1.90/MMBtu. What's going on?

Winter has been milder than usual - Most of the country experienced warmer-than-average temperatures in December and January, with much of the east and south three to five degrees above average.

Gas in storage was a bit higher - Working gas in storage exceeded the five-year average for the first time in two years. While we're currently running a bit above average, working gas in storage is currently 61% of capacity.

U.S. gas production is at record levels - U.S. natural gas production is currently just over 90 Bcf/d. The primary sources of new gas production are the Marcellus and Haynesville shale plays and associated gas from oil drilling in the Permian and Eagle Ford plays.

Slowing demand growth - Although gas has taken market share from coal over the last several years, fuel switching has slowed.

What will it take to restore gas supply/demand balance and generate support for higher prices?

Reduced gas drilling - As in every other commodity price cycle, the cure for low prices is low prices. According to Baker Hughes, gas-directed drilling has been dropping rapidly since the beginning of 2019 when there were about 200 gas-directed rigs. Currently, there are only about 100 rigs drilling for gas, and they’re concentrated in the best gas plays (Marcellus, Haynesville, Utica and liquids rich portions of the Delaware Basin). The EIA projects gas production will increase less than 3% next year.

Continued coal-to-gas switching - In the short-term, expectations are low for continued coal-to-gas switching, but long-term trends support further reductions in coal's market share. BTU Analytics recently estimated that the switching potential could be as much as 12 Bcf/d, but low breakeven points and regulatory/reliability issues has entrenched many coal-fired plants.

LNG exports - Gas exports more than doubled in 2019 from about 2 Bcf/d to over 5 Bcf/d and are expected to reach 9 Bcf/d by the end of 2020. Increased LNG capacity and electrical demand in Mexico are driving export demand.

Overall, 2020 looks to be a challenging gas price environment. Increases in gas exports are likely to be offset by supply increases and coal-to-gas switching has stalled. Unless drilling activity continues to drop or more coal-fired plants are retired, $2/MMBtu gas is here to stay.

This article was published in the February 11, 2020 issue of the RED Weekly E&P Update Newsletter