U.S. gas surplus keeps prices down
Drilling activity has slowed with ample levels of U.S. gas sitting in storage.
U.S. gas inventories are sharply higher than they were a year ago, helping to keep a lid on prices and forcing a slowdown in drilling.
A relatively mild winter and an average spring allowed gas inventories to surge higher, pushed up by soaring levels of U.S. gas production. In March, the latest month for which data is available, gas output shot up to 123.99 billion cubic feet per day, the highest monthly total on record.
The latest data from the U.S. Energy Information Administration shows that gas storage levels rose to 2,805 billion cubic feet for the week ending on June 23, or more than 25 percent higher than year-ago levels. Looking further back at the five-year average for this time of year, gas inventories are also 14.6 percent higher than what is typical.
With high output and storage levels filling up, prices have plunged, especially compared to the eye-watering wartime prices from last year. Natural gas prices hit a high in August 2022 at over $9 per MMBtu, but now trade comfortably below $3.
To be sure, markets have tightened up a bit recently. Sweltering temperatures across the U.S. South — undoubtedly made much worse by the climate crisis — is pushing up power demand. Natural gas prices have climbed in June as a result.
But they still remain relatively low, and may not meaningfully move higher in the short run, according to analysts. “Barring a significant tightening of balances, we believe sustained price upside from here is rather limited,” Goldman Sachs wrote in a June 26 note to clients.
The problem from the industry’s perspective is that prices are too low to expand drilling. Companies are looking at prices and the current fundamentals and deciding to sideline drilling operations. The number of drilling rigs that U.S. gas companies are currently using in the field was down to 130 for the week ending on June 23, down from a recent high of 166 last September, according to data from oilfield services firm Baker Hughes.
“Natural gas prices are unsustainable, and if they stay at this level for the better part of 2023, it is going to do great damage to our ability to provide natural gas in the future,” one anonymous executive from an oil and gas company said in response to a quarterly survey conducted by the Dallas branch of the U.S. Federal Reserve.