The situation surrounding the U.S. natural gas market isn’t particularly good. Not because companies are struggling or that output is low, rather, output has never been higher. As a result, prices for certain energy commodities have been plummeting nonstop.
That’s exactly what has been happening with natural gas as stockpiles in the United States have pushed prices to record lows. Now it appears that gas could easily reach a 50-year low, according to analysts at one research firm.
IHS Markit, a global information provider market information, issued a report on Thursday which stated that prices for natural gas will fall to levels not seen since the 1970s. New pipelines are allowing further increases of natural gas output coming from the Permian basin located in West Texas and eastern New Mexico.
IHS Markit forecasts that the average gas price in 2020 will drop to $1.92 per British thermal units (mmBtu), a new low that hasn’t been seen in 50 years even after taking inflation into effect.
The closest the markets have come to hitting such a low price is back in 1995 where prices fell to just below $2 per mmBtu, but 2020 is expected to fall below even that point. “It is simply too much too fast. Drillers are now able to increase supply faster than domestic or global markets can consume it,” commented Sam Andrus, IHS Markit executive director and North American gas market expert. “Rising prices stimulate supply and falling prices curtail it. What is unique here is the extent of reduction required. But signs still point to this coming price fall having a limited shelf life rather than being the new normal,” added Shankari Srinivasan, IHS Markit vice president of energy.
The next major pipeline that is expected to come online in the region is the Kinder Morgan $1.75 billion pipeline, which is estimated to begin carrying oil and gas sometime next month.
Overall, pipeline capacity in the Permian basin is expected to steadily increase by 6 billion cubic feet daily well into 2022, something which would help reduce price inefficiencies in the region where certain hubs are so over flooded with gas that they can’t sell the excess even at greatly reduced prices.
Back in May, some regions of the basin saw natural gas prices dip into the negative, where buyers would get paid for taking the excessive gas of producer’s hands. Specifically, the Waha hub saw prices fall below zero at -0.40 cents mmBtu.
The main reason is that the construction of new pipelines has not kept up with the increase in production seen in the area. With energy companies from all over the world selling their assets in less-stellar performing areas like Canada and the North Sea to instead focus on America, gas production shows no signs of slowing down.
Commodity investors have been betting that natural gas prices will fall for a while, knowing full well that the lack of pipeline infrastructure in the Permian basin will lead to an oversupply issue. Back in August, hedge funds collectively took their most bearish position in natural gas prices in over ten years. At this point, prices for natural gas aren’t giving any indication that they will make a recovery.
