Could Pressures in the Natural Gas Market Cause Rising Prices?
Natural gas, and therefore, electricity pricing, has been at an all time low for much of the year, bottoming out at $2.10MMbtu’s in August 2019. However, there are multiple factors that are likely to cause a spike in pricing going forward. Natural gas, which drives electricity pricing, is determined by the balance of supply and demand. There are multiple lead indicators of the likelihood that the surplus of natural gas storage over demand will invert. We’ve had historically high natural gas production of 92.2 billion Bcf/day causing a surplus of inventory. The natural gas pricing was driven down below the breakeven price for producers to cover basic operating costs of $2.50MMBtu’s. The lack in return is causing increasing concern for investors resulting in pressure that causes natural gas production to head toward a more stabilized production rate. The result would likely be demand reaching, and eventually surpassing, the level of inventory causing a deficit of storage to demand. In order to meet demand, inventory would have to be used out of the DUC (Drilled But Uncompleted) wells in the Marcellus Utica region, likely resulting in the depletion of the DUC inventory over time. Drilled wells naturally decline in production rate over time and most decline within the first several months, therefore, capital is needed to support continued drilling activity to make up for the deficit. However, pressure from investors for a return has also led to a decrease in DUC permits and rig counts and increased their hesitancy to invest in natural gas drilling going forward.
Demand for natural gas has slightly increased with the expansion of LNG export terminals in the U.S to five locations. By 2021 the EIA projects the export LNG capacity will be 9.0 Bcf/day baseload across six LNG export terminals. Profitable pricing and increased use from various countries, such as Mexico, has likely contributed to the increase in demand. Mexico exports are predicted to rise from 5.1Bcf/day to 5.5 Bcf/day in December 2019 once the Sur de Texas-Tuxpan gas pipeline reaches its full capacity. There will likely be additional plants built in the future to maintain the demand. The addition of and structural improvements of pipelines has also likely contributed to rising demand. Pipelines have been able to carry increased loads and serve new locations. However, these additions require increased capital to maintain and improve infrastructures.
The natural gas market is the second most capital-intensive market behind railroads. The lack of return causes increasing concern for investors and many will likely hold off on investing in capital for production. The possible recession within the next few years would only exacerbate uncertainty in the energy market and would most likely cause even more conservative choices with investors. With the profitability pressure, the natural decline of a well’s life, production softening, and investors most likely tightening their wallets, it is likely that pricing will spike to possibly double or triple pricing of close to the $4MMBtu range in the future.
To possibly avoid increasing energy costs in the market and mitigate additional risk, contact APPI Energy to learn more about their energy procurement and consulting services. We can work with you to provide budget certainty and contract terms that are perfect for your business. For more information about APPI Energy’s services, or to inquire about an energy efficiency project, please call 800-520-6685.