Plunge taking place despite drop in inventory

Natural gas prices in the United States have been plummeting over the past few weeks and have remained low entering the new year.

Gas prices have dropped by as much as 50 per cent in less than a month. Bloomberg reported this week that the decline is expected to continue this year as well as production growth continues to outpace demand growth.

Prices have remained low thanks to fast growth in production, which has outpaced both consumption and export growth. Interestingly prices have remained low despite a sharp drop in inventories at the end of 2022.

Speaking with OilPrice.com, Reuters senior market analyst, specialising in oil and energy systems, John Kemp points out that working gas stocks in underground storage in the US had ended last year nine per cent below the five-year average for that time of the year. This is a fall of three per cent in just two weeks.

Reason given for sharp slump

The reason for the sharp slump, he argues was the cold spell that gripped much of the United States, driving much higher demand for gas. Prices, Kemp contends, have remained low thanks to fast growth in production, which has outpaced both consumption and export growth.

Bloomberg this week quoted an analyst as saying the market does not need this incremental growth and will ultimately need to force the curve lower to push rigs out of the market.

Kemp advises that front-month gas futures on Wednesday were cheaper than US$3.70 per Metric Million British Thermal Unit (MMBtu), down from US$9.60 per MMBtu in August last year.

MMBtu is a unit traditionally used to measure heat content or energy value. However, other experts are forecasting continued price volatility because of the war in Ukraine and the Western sanctions on Russia.

“Alternative supplies are being developed, but it will take years for Europe to replace Russian gas, so price volatility is likely to remain a feature of the market for some time,” OilPrice.com quotes Michael Rosen, chief investment officer at Angeles Investments, telling Barron’s this week.

Morgan Stanley is more upbeat, arguing that weaker gas demand from Europe thanks to the warm winter, which means more US LNG would be freed to go to China, where the reopening of the economy will feature higher energy demand.