Surging US natural gas production sees summer prices sink to 20‐year lows

• Date: 01 September 2019
• Published date: 01 September 2019
• DOI: http://doi.org/10.1111/oet.12730

GAS AND POWER

Surging US natural gas production sees summer prices sink

to 20-year lows

Rapid growth in US power sector demand and US gas

exports has still not been enough to soak up record levels of

US gas supply—leading to depressed prices, not only in the

United States, but globally as US liquefied natural gas

(LNG) exports add to a wider surplus.

During the first 2 months of this summer (June 1-August

1), Henry Hub prices—the United States' main gas price

benchmark—averaged just $2.31/MMBtu, 19% lower than

during the same period last year, and the lowest for two

decades. Spot gas prices elsewhere in the United States and

Canada were often even lower, especially near the large pro-

ducing basins. These US prices are by far the lowest traded

gas prices in the world currently, although other major

benchmarks in Europe and Asia are also depressed—partly

due to rising US LNG exports. This is eroding the returns

and share values of the major oil and gas producers that have

focused on gas/LNG, such as Shell

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and Total, while the

record low US prices have seen a number of gas-focused US

independent producers go under.

Much of the gas produced in the United States today is

associated gas from shale oil production, which tends to rise

in line with oil output, irrespective of gas prices. Where pos-

sible, producers are cutting back on upstream gas invest-

ment, with recent months seeing falls in rig numbers at

gassier basins. But when it is produced as a byproduct, it

flows according to the oil economics—and at very low cost.

The issue is particularly acute in the Permian Basin, where a

lack of export pipeline capacity and rapidly rising oil and

gas output has encouraged producers to flare gas. A more

productive option has been gas reinjection, which can lead

to significantly higher oil output from fracked wells.

The cheap prices have also helped encourage demand

growth, but not by enough to absorb all the additional supply

and push prices back up again. The biggest expansion has been

in the US electric power sector, with record levels of power

consumption, combined with a rise in gas-fired capacity, lead-

ing to record levels of gas-to-power demand. In the hour end-

ing at 6 PM ET on 19 July, hourly electricity demand peaked at

a record 704 GW, according to the EIA (see Figure 1). This

caused gas-to-power demand to reach a record 44.5 bn cfd on

July 19 (lower 48 states). The record was also broken in 2016

and 2018 (when it reached 43.1 bn cfd), illustrating the steady

rise over recent years. US power demand peaks during sum-

mer heat waves due to high cooling demand.

The low-cost gas is helping with a widespread transition in

the United States away from coal-fired generating capacity to a

combination of renewables and gas—a switch that is dramati-

cally reducing the carbon intensity of the US power sector,

suggesting fracking companies may not deserve the wholly

negative reputation they have among environmentalists. Rela-

tively cheap gas has had a similar impact in the United King-

dom, by displacing coal almost entirely, in partnership with

renewables (with some government support). On the other

hand, rising average and peak temperatures, possibly linked to

climate change, are leading to higher power usage for cooling

in hot countries including the United States.

FIGURE 1 Hourly electricity

demand in the Lower 48 states (7 July-27

July, 2019). Source: US Energy

Information Administration, US Electric

System Operating Data.

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