Natural Gas: Prices Could Stay Subdued in 2024 Amid Current Fundamental Conditions
Alexey Afanassievskiy | Feb 20, 2024 03:54AM ET
In 2024, the U.S. gas market remains highly volatile. Since January 13, the price of gas has fallen by more than 40% to $1.6 for an MMBTU.
But why is this happening, and what affects the price of gas?
Previously, the number of drilling rigs in operation was crucial, and the price of gas strongly correlated with this figure and production volumes. However, today, the correlation between output and the number of rigs has practically become insignificant.
h2 Weather conditions/h2The consumption structure states that the primary sales market is the United States itself, so this price chart is mainly explained by the weather in this country. The weather conditions vary, and gas consumption is peaking in winter and summer. For example, in summer, the central heights of consumption occur in July and August, and by the winter months, they increase by 1.5 times.
Dynamics of natural gas prices
Source: Investing.com
The problem with the weather is that the temperature can drop sharply in a very short period. Then, the maximum extraction of gas from storage facilities should begin. Respectively, gas spot prices increase. And when the weather gets better, the price drops.
Starting in spring and until the end of October, approximately 10% of production goes to underground gas storage facilities (UGS). This helps the country to survive the winter, as gas consumption for heating can increase five times in three days. Of course, it is impossible to increase production volumes so quickly, so reserves from storage cover the deficit. Another reason for the decline is the slowdown in exports due to the cold weather. In this case, there is an oversupply of gas in the domestic market, and the spot price decreases significantly.
h2 Increased production and exports/h2Fundamental changes in gas production, such as hydraulic fracturing and horizontal drilling, have allowed the United States to almost double its output since 2009 by 2023. The United States is the world's leading natural gas producer, although its proven reserves account for only a third of Russia's reserves. In 2022, gross natural gas production in the United States amounted to 43,802,269 million cubic feet.
The increase in gas production made it possible to begin the global restructuring of all energy capacities and embark on the path of green transformation. The United States is actively involved in decarbonization and developing renewable energy (wind and solar). Additionally, coal plants are being re-equipped or closed.
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In parallel with the increase in production, gas transportation through US gas pipelines developed. This can be traced by the price difference at intermediate hubs, for example, Waha Hub and Henry Hub. Previously, prices reached a difference of 10 times, but over some periods this spread narrowed. In the next two years, it is expected that prices will draw together.
Moreover, the export shipment of liquefied natural gas (LNG) began in 2015 and increased in seven years from 28,381 million cubic feet in 2015 to 3,865,643 in 2022.
h2 Lack of growth in the number of gas storage facilities/h2As mentioned above, gas production is increasing. Industrial gas consumption is also growing. But paradoxically, there is no increase in the number of underground gas storage facilities introduced. There is an economic explanation for this.
Between 2009 and 2022, the drilling rate increased fivefold. The area's geological study has expanded, allowing for accurate well modeling. The length of the horizontal trunk has also improved, and the grid of wells has been brought to an optimal one. Moreover, the productivity of the equipment has increased, and the cost of this equipment has also decreased. As a result, the cost of well construction was halved, and productivity multiplied by ten. Therefore, the correlation between production and the number of drilling rigs has ceased to be significant.
According to my estimates, with a sharp decrease in exports, the gas price will decrease to $1.5 - 1.8 for an MMBTU. Such a price will stop the introduction of new wells and drilling. Accordingly, without introducing wells, there will be a decrease in production for the month and price stabilization. The excess gas will be pumped into the UGS within a month, corresponding to peak daily injections into storage facilities. According to regulatory requirements, peak injection can be kept for a month, and during this time, production will decrease. Subsequently, despite the current drop, we can expect the average gas price in 2024 in the USA at $2.6 - 2.8.
h2 Modernization of production is what awaits us in the future/h2Today, the United States is undergoing a transition to a new technological order. Robots perform technological operations, and they are controlled using artificial intelligence based on clean energy. Despite digitalization, human capital remains a priority. The United States continues to focus on developing intelligence, attracting the best minds from around the world.
There is a question of finding raw materials for producing new high-tech goods. In this context, the United States is increasingly using chemical compounds based on hydrocarbons, replacing metal and cotton products with them. In addition, the country is actively promoting a zero-liquid discharge policy, seeking to involve more and more human waste products and recyclables in secondary circulation.
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