US NATURAL GAS 2022 – 2024 US$/MMbtu
US natural gas prices are starting to move again after a year of hitting record lows, as the chart shows. As Reuters noted early last week:
“After an exceptionally mild start to the winter, U.S. heating demand has increased significantly and has been above the long-term seasonal average since late November.”
The immediate cause, as the Wall Street Journal reports was:
“A 190 Bcf (Billion cubic foot) withdrawal from storage for last week that reduced the inventory surplus over the five-year average to 165 Bcf from 284 Bcf the week before…. The draw was the largest on record this early in the winter season.”
And commentators are suggesting “Inventories are likely to fall to a deficit to year-ago levels before the end of the month.”
THE US HAS SEEN RECORD LEVELS OF GAS PRODUCTION
The issue is simply that it takes a long time to ramp supply up or down. Drilling rigs have to be hired or contracts terminated. Skilled workers also have to be hired or terminated. And all the support teams have to be created or disbanded:
- The result is that companies are relatively slow to increase production. And so prices can easily soar to near record levels, as happened in 2022
- Once all these resources have been put in place in response to higher prices, it then takes some time for output to reduce
As the EIA charts show, there is therefore a clear relationship between production and storage:
- Natural gas output hit a record level in 2023, with 5 states producing > 70% of the record 113.1 Bcf/d output
- Texas was 28% of output, Pennsylvania 18%, Louisiana 10%, West Virginia 8% and New Mexico 8%
- Demand couldn’t keep up, even though the rock-bottom prices encouraged power generators to make a major switch from coal to gas
- Inevitably, therefore the volume of gas in storage has been well above the 5-year maximum level in 2024
- And although producers finally began to cut back, this move came too late to stop prices falling to record lows last month
A TRANSITION FROM EL NIÑO TO LA NIÑA MAY BE UNDERWAY
Now, of course, the hard decisions have been made. And it will likely be some time before drillers gain enough confidence to start a new production cycle.
This change in approach seems likely to coincide with a change in weather patterns from El Niño to La Niña, as the US National Ocean Service reports:
“La Niña is still the most likely outcome for the approaching Northern Hemisphere winter. This is late for La Niña to arrive, and it’s very likely to be a weak event. However, even a weak event can influence temperature, rain, and snow patterns across the world.”
As its chart shows, the two patterns start with either a warming or cooling of the central and eastern equatorial Pacific Ocean.
“La Niña is still the most likely outcome for the approaching Northern Hemisphere winter. This is late for La Niña to arrive, and it’s very likely to be a weak event. However, even a weak event can influence temperature, rain, and snow patterns across the world.”
As its chart shows, the two patterns start with either a warming or cooling of the central and eastern equatorial Pacific Ocean.
- In the La Niña sequence, the cooling of the ocean then pushes cold air into the atmosphere, causing the jet stream to trap cold air from the Arctic and increase the chances of cold weather across the northern US and Europe
- In the El Niño sequence, the opposite happens, with the warmer air pushing the jet stream further north and generally leading to wetter weather (as warm air can contain more water molecules)
THIS WINTER SEEMS LIKELY TO BE COLDER AGAIN IN EUROPE/US
Weather forecasting is never an exact science, even with today’s computing power. But the balance of probabilities suggests we have seen the end of the recent warm winters created by El Niño.
Instead, even a weak La Niña will likely lead to colder weather across the northern US and Europe.
In normal times, this would simply mean more demand for energy due to an increase in the number of “heating days”. But these days, “everything is also geopolitical” as Bloomberg notes:
“Europe is in the midst of what is forecast to be its coldest winter since Russia’s invasion of Ukraine, with the continent already dipping deeper than usual into gas storage as temperatures plummet.”
This is clearly bad news for the economy. And the colder weather will make life even harder for those fighting on the frontline in Ukraine.