Proven natural gas reserves in the U.S. are no more than about 300 trillion cubic feet – less than five percent of the world’s supplies. Yet, the U.S. has exploited its natural gas resources far more vigorously than any other country. In the year 2017, for instance, the U.S. produced about 70 billion cubic feet per day, or about 20 percent of the world’s natural gas production. This makes America the single most important source of the world’s natural gas.
How Did the U.S. Get Here?
The U.S. didn’t always lead the natural gas supply industry. American production of natural gas declined around the year 2005 and caused prices to surge to over $15/MMBtu (million British thermal units). Various industry insiders, including Matt Simmons and T. Boone Pickens, took the view then that there was a natural gas crisis looming, one with no acceptable way out. Exxon Mobil and Conoco Phillips began to believe that the future held shortages of natural gas, and consequently, higher prices.
Hoping to profit from the surge in prices that they hoped to see before long, these companies busily acquired natural gas exporting businesses, and built large LNG import terminals.
The mistake they made was they were unaware of new developments in fracking and horizontal drilling. Those advances helped raise U.S. production levels back to where they were before the drop of 2005 and helped settle down at about $5/MMBtu. Save for a few exceptions, such as in 2014 when winter demand for heating fuel raised prices to $8/MMBtu, prices since then have remained low.
Where Do the Prices Go From Here?
Demand for natural gas primarily comes from residential heating needs. A certain rise in demand and a corresponding bump in prices are a given in winter. An unexpectedly cold winter can lead to a swift rise in prices for two reasons – demand naturally raises prices; unexpected demand also causes a drop in inventories. Fallen inventories can only lead to raised prices.
As an example, the winter of 2012 was unexpectedly warm; there wasn’t much demand, and inventories became very high as well. Prices cratered and settled at around $2/MMBtu. Prices didn’t recover until 2014 when the country experienced a real winter, and inventories dropped to all-time lows. Prices rose to between $4 and $8, a level that proved lasting.
The winter of 2018 promises to be a low inventory period as well. The winter heating season begins in November. As the holiday season approaches, seasonal inventories are the lowest that they have been in five years. Demand is likely to be high because American consumption has risen by about 8% over the past few years. Natural gas inventories currently on hand are not likely to last as long as they would otherwise have.
Pricing for Natural Gas Is Experiencing a Disconnect
Inventory prices for supply in January and February 2019 still hover around the $3/MMBtu level. It doesn’t look as if major distributors have any plans to restock their inventories. If such restocking doesn’t raise inventories, it would appear that prices can only rise in short order.
According to Sigma Drilling Technologies, a dampener manufacturer and pulsation solutions company that supplies the natural gas drilling industry, unforeseen factors have not been adequately considered in the determination of the current pricing level, either. A cold winter, a temporary drop in production somewhere or a rise in demand from Mexico could quickly raise prices.
American drillers need to be aware of the overwhelming possibility that natural gas prices will be encouragingly high this winter. To request a free product demonstration by Sigma Drilling Technologies, call (281) 656-9298 or fill out our contact form today.
