Natural gas prices have fallen more than 40% since reaching their shale peak in late August, reducing the risk of budget-busting heating bills for millions of Americans this winter and potentially easing huge cost pressures on producers.
The decline is due to a warm fall, record domestic production and gas storage quickly filling up from the end of the air conditioning season. Now, one of the main causes of inflation costs about the same as it did a year ago.
Analysts warn that unusually cold weather could push prices higher again this winter, particularly in the Northeast, where pipelines are effectively limiting output from Appalachia’s prolific producers.
However, many predict that prices in 2023 will be lower on average than they are this year. They expect increased supply from increasingly efficient North American drillers, along with slower growing demand from an economy pulled back by central bankers trying to slow inflation with higher borrowing costs.
December natural gas futures ended Friday at $5,684 per million British thermal units, up just 4.75% from a year earlier. Early last week, futures fell below $5 for the first time since March, when energy markets were rocked by Russia’s intervention in Ukraine.
Permian Basin producers have sunk the Waha trading center in West Texas in recent days, pushing prices into negative territory. In some cash trades, sellers paid buyers more than $1 per million British thermal units to take the gas, which was more than $8 in early September, according to S&P Global Commodity Insights.
Analysts say futures prices are likely to rise slightly after the furnaces are lit and a large liquefied natural gas export terminal in Texas resumes operations after a fire this summer. But they expect prices to drop next year.
Goldman Sachs analysts predict benchmark prices in the US will average $5 per million British thermal units in 2023. BofA Securities expects $4.50. By Friday, natural gas futures had averaged about $6.60 per million British thermal units this year, hurting not only households but also producers of gas-guzzling materials from steel and cement to plastics and fertilizers.
Investors are also betting on cheaper gas. Data from the Commodity Futures Trading Commission shows that in recent weeks, hedge funds and other speculators have made their biggest collective bets that prices will fall after panic selling during the Covid lockdown in early 2020.
Natural gas prices have been a safe bet since the early days of the pandemic. The shutdown of coal-fired power plants has left electricity producers with no alternative to natural gas. Since the invasion of Ukraine, European utilities and producers have been offering boatloads of shale gas to replace Russian exports.
U.S. natural gas inventories ended last heating season about 18% below normal levels. Another steamy summer, strong exports and a reluctance among North American drillers to pump cash to their shareholders prevented domestic storage from being overfilled. By August, stocks were still about 13% below normal, and prices rose above $10 for the first time since 2008, when the shale drilling boom was just beginning.
Mild weather in September meant less gas was burned to run air conditioners. Meanwhile, U.S. output rose to a record high of more than 100 billion cubic feet per day, and a prolonged outage at Freeport LNG’s Texas export terminal made available much of the gas that would otherwise be sold overseas.
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Traders began pumping more gas into storage tanks and caves, and winterized the gas when demand was greatest.
Between September 9 and October 14, 571 billion cubic feet of gas was added to reserves, the largest gas production in five weeks. The deficit has been reduced by more than half, reaching normal levels. According to the Energy Information Administration, as of a week ago, the volume of gas in storage was 5.5% of the normal level for this time of the year.
Matthew Palmer, executive director of Global Gas at S&P Global Commodity Insights, said the firm expects U.S. inventories to fill further and start the winter at about 3.6 trillion cubic feet, in line with recent years.
“That should be enough for most weather scenarios,” he said. A really cold winter, like the cold season of 2013-14, which drew about 3 trillion cubic feet from storage, could push prices north of $10, he said.
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