“Think we’ll have a cold winter this year?” That’s been a common question heard in the office hallways and field locations of U.S. producers of natural gas since price deregulation occurred in the late 1980s. A colder-than-normal winter has always meant strong demand for the product, which in turn meant stronger prices at the wellhead, which generated more free cash flow and increased capital for drilling budgets for the following year.
All of those things meant more job creation and enhanced job security for the men and women asking that question in the hallway or out in the field. The answer was important to everyone, and the question typically began to be asked in earnest in early September, as summer came to an end and the weather began to cool.
This year is different, though. For the first time in a long time – probably since the price for natural gas came crashing down in 2008 as the massive Marcellus Shale and Haynesville resources began to fully come on line, creating what has been a persistent domestic supply glut – U.S. natural gas producers find themselves in a strong price position heading into the fall and not overly concerned about the direction of the weather to come.
The NYMEX Henry Hub index price, which fell below the $2 per Mmbtu level during the depths of the COVID pandemic for several months last year, has more than doubled since, and stood over $4.60 at Tuesday’s open. Even more encouraging for these producers, they have reason to be optimistic that the price could hold at this level or even move higher regardless of whether or not the U.S. experiences a winter that is colder or warmer than normal.
One reason for such optimism lies in the underground storage levels that every gas producer watches closely. This is gas injected into massive underground caverns during low-demand months in the spring and fall and used to fill needs during high demand months in the heat 0f summer and depths of winter. According to the U.S. Energy Information Administration (EIA), current volume in working storage is almost 17% below last year’s level and 7.2% under the 5-year running average. Such a tight storage situation places upward pressure on prices.
Hurricane Ida, which took essentially 100% of oil and natural gas production from the Gulf of Mexico offline as producers were forced to shut-in their platforms and facilities, has also put upwards pressure on the price. According to the EIA, the Gulf generates about 15% of the nation’s oil production and 5% of its dry gas volumes, and as of Monday, virtually all of it remained offline, resulting in an even tighter U.S. supply situation. That production will likely return to normal within weeks, but the temporary loss will limit volumes going into storage in the meantime.
Then there’s the fact that, over the last half-decade, exports of liquefied natural gas (LNG) have transformed the U.S. natural gas market from a domestic market into a global powerhouse. The EIA reports that US LNG exports hit record highs in March of this year and have remained at elevated levels since. The EIA projects those export volumes – as well as exports via pipelines into Mexico and Canada – to continue to grow through 2022 and beyond as demand rises and new export facilities and planned pipelines continue to come online.
All of these factors and more have created a new paradigm for domestic natural gas producers, who have had to work hard over the last dozen years to create new areas of demand for their overwhelming production. With the Biden/Harris administration working hard to place new restrictions on domestic producers, the prevailing narrative around U.S. natural gas has begun to rapidly shift to growing concerns about whether they will be able to meet the country’s future needs.
Thus, while the question about whether or not we will have a cold winter is probably still being asked in hallways and field locations, the underlying concern behind it has now likely shifted. Rather than being worried about future job security, employees are more likely to be concerned about their companies’ ability to meet all the rising demands on their production.
It’s not necessarily a good problem to have, but it is a different one than these companies have experienced in the recent past.