US natural gas prices drop to lowest level in 4 years

Supply expected to keep growing in 2020 while demand has been subdued

David Sheppard, Energy Editor    1/20/2020

US natural gas prices fell to the lowest level in four years on Monday, plunging below $2 per million British thermal units as ample supplies and warmer-than-expected weather weigh on the market.

Benchmark prices for US natural gas have more than halved since late 2018, posing a challenge to producers of the fuel in the shale fields of Texas and Pennsylvania. But traders remain bearish on the outlook despite forecasts that output could eventually start to fall. Drillers have conserved cash rather than pursue ever-higher production after the market slumped.

Last week, the US Energy Information Administration forecast that supplies of domestically produced natural gas would not start to fall until 2021. It said output should rise 3 per cent this year to a new record of 94.7bn cubic feet per day.

Traders said the slide below $2 per mmbtu to a low of $1.83 on Monday came as much of the US experienced unseasonably mild temperatures, reducing demand for natural gas that is widely used in heating as well as electricity generation.

It is not just a problem in the US. Warmer temperatures in parts of Europe and Asia have also cut demand for natural gas, which feeds back into the US price given its growing role as a major exporter of liquefied natural gas. “Warm weather has sapped global heating demand,” said analysts at Energy Aspects, a consultancy.

Ole Hansen at Saxo Bank said concerns were growing that with the mild winter looking set to continue, the US could head into the spring and summer with inventory levels well above average. That is before the traditional build-up in storage over the warmer months.

“We’re basically running out of winter with weather forecasts so far not picking up any signs of a dramatic change in February,” Mr Hansen said. “We need to see a response from producers willing to reduce production before this market bottoms out, as at the moment there is just too much supply. But that may not happen quickly.”

Hedge funds, encouraged by the supply glut, have taken to betting increasingly aggressively against the price. In the past week they upped their net short positions — the difference between bets on falling and rising prices — to almost 267,000 futures and options contracts. That is the largest short position on record based on data going back to 2013.

Last year, hedge funds’ bet against the US natural gas market peaked in the summer at less than 240,000 contracts.

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Wonder what effect will this have on Cameron LNG?

There are other experienced LNG engineering firms available if they have room with their scheduled commitments.  I would think that cheap natural gas may encourage Cameron LNG to shift gears and press on.  It's a race to see which projects can get past FID and turn some dirt.  There is only room for a few before investors start to pull back.

Poor labor productivity, rising costs plagued McDermott before bankruptcy filing

Poor labor productivity and rising construction and subcontractor costs are said to be what triggered the cost overrun issues that were plaguing McDermott International Inc. on two of its major construction projects, leading the company to submit a prepackaged bankruptcy filing that it says will eliminate more than $4.6 billion in debt.

It’s been two days since the Houston-based company announced it would file for Chapter 11 bankruptcy protection and go through a restructuring process, financed by a $2.8 billion debtor-in-possession financing plan that McDermott says will allow it to stabilize its cash flow, continue normal business operations and fulfill its commitments to all stakeholders. 

Looming behind the filing: A $19 billion backlog of projects that McDermott inherited in 2017 when it acquired CB&I in a $6 billion all-stock transaction. (Previously, CB&I had purchased the Baton Rouge-based Shaw Group for $3 billion in 2013.) The move lifted McDermott’s debt burden to some $4.3 billion.

The CB&I backlog includes two major liquefied natural gas construction projects—the Cameron LNG facility in Hackberry, Louisiana, and the Freeport LNG facility in Freeport, Texas—which, largely due to cost overrun issues, have further strained the company’s finances after years of low oil prices.

With this backlog, the company has had problems securing letters of credit, as it’s already reached capacity and cannot exceed the limit.

Louisiana shows one case where it’s been difficult for the company to maintain a timely balance between the cash it receives from customers and the cash it spends on projects. In 2014, a joint venture between CB&I and Chiyoda International Corporation was awarded a $6 billion contract to construct the Cameron LNG facility under fixed terms. The project was promised to create approximately 3,000 on-site jobs, as well as several hundred jobs at CB&I’s fabrication facilities in Louisiana and several hundred engineering and project management jobs in the company’s Baton Rouge office.

It’s unclear how many construction jobs—or local office jobs—have been created as a result of construction on the Louisiana facility, which is approximately 93% complete and now estimated to cost $10 billion. But according to some in the industry familiar with the phrase, “poor labor productivity” means McDermott thought its construction workers could accomplish more tasks in fewer hours than they actually did; in other words, the workers were performing less efficiently than management estimated during the bid process.

Is this a reflection of statewide construction job shortages or other labor force issues unique to Louisiana? David Helveston, president of ABC Pelican, doesn’t think so.

“Our indication is that this is company-specific, but generally the construction industry within Louisiana is well-positioned for the future,” Helveston says.

As for the rising construction and subcontractor costs (for which there is no estimated price tag), state economist Loren Scott says he’s “a little surprised” subcontractor costs would be going up, considering employment is down within Louisiana in the midst of a construction lull.

“Normally when you’re in a lull, there’s decreasing pressure on subcontractor costs, not increasing pressure,” Scott says. “Last I checked, construction employment is down 10,000 jobs.”

It’s not the only cost overrun issue playing out in Louisiana, Scott adds, pointing to the recent $2 billion cost overrun for the Sassol project in Lake Charles, which resulted in the firing of two C-level Sassol executives.

“Is it a Louisiana thing, a company thing or what?” Scott says. “What’s going on here?”

Yeah - I am again suggesting that somewhere, somehow - someone might seek some kind of: (1) Federal Tax Credit, or - (2) An Actual Subsidy for natural gas producers.  Decades ago, I bought into the hype spewed out of government - that - natural gas was the wave of the future, by-golly ! !  Environmentally good (not bad) - save the planet > save the world, make a good living, while doing good things !!!  I believe that (due to the 'markets'), natural gas royalties could pay only somewhere between $2.10 & $1.80 per MCF.  Amazing . . solar panels and wind turbans get all kinds of subsidies; but, the most energy-intensive, clean-burning fuel is adrift, without enough help to keep from price collapses.

GR, years ago there were price controls on NG production. And back then, the price of NG was much higher, too. This was a good thing for us folks who had royalty income being paid on the old vert wells. But then a certain president decided to eliminate the price controls. Not good. 

The tax advantages available to oil and gas companies are stunning although they are seldom discussed and seem to fly under the radar of most folks.  I have listed them on many occasions previously and anyone that is interested can find them through a simple Internet search. 

Subsidies for renewable energy sources are declining and in many cases may be eliminated entirely in the very near future.  The thing that we must keep in mind is that over the ten + years we GHS members have been following and discussing wind and solar, both have become cheaper than coal and price competitive with natural gas without any subsidy.  Let me repeat.  Solar and wind no longer need any subsidy to be as cheap or cheaper than natural gas for generating electricity.  And both continue to come down in cost and increase in efficiency.

For those who are skeptical or wish to explore the fact in greater depth, I suggest the following article.

Debt & bankruptcy are inevitable at these prices.  No one benefits except the end users who pay next to nothing for NAT GAS - $1.80 in the dead of winter.  Supply and demand is killing the industry.  

At some price point (maybe $1.25) - operators will come to the determination that losing money is not a good proposition.  After HAL lost $10 Billion last year - guessing that they will drastically alter their long range plan.  Operators need to do the same thing.

 Quit drilling NAT GAS wells for 5 years and watch the price soar to profitable numbers again.  It needs to be an OPEC kind of mentality for domestic gas producers or misery will be their middle name forever.

IMO, the problem of natural gas supply is not going away anytime soon.  First, as long as crude prices provide even a modest profit margin, there will be a surplus of "associated gas" from oil wells, see the Permian Basin.  Secondly, the two major gas basins, Haynesville and Marcellus, are predominantly operated by mid-major and smaller companies.  Those companies are generally highly leveraged and incapable of scaling back production owing to a number of reasons:  maintaining cash flow to cover daily operations and meet debt obligations, drilling and minimum volume commitments, and lack of ability to switch capital expenditures to oily assets.  In other words, those companies can not stop drilling and may be limited in how much they can cut back production.  They will keep drilling until they have to negotiate pre-packaged bankruptcies with creditors, where possible, so they can reduce debt and operating costs and emerge as marginally profitable operations.  Of course the real answer to the problem is for the bulk of those small to mid-size gas-focused companies to be acquired by major/super-major energy companies that do not have the debt problem nor the inescapable need to keep drilling in a supply glut.

Negative cash flow is better then NO cash flow at all

But only for so long!  :-)

Oh yeah, that's a given-but you are right

I fear we are in for low natural gas prices for the next four or five years.  I hope I'm wrong but it is beginning to look doubtful that LNG export will be the savior we hoped for.  No matter how much the demand increases, the supply exceeds it.


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