Natural Gas Is Stuck in a Vicious Cycle

Prices have fallen more than 25% this year and may remain weak for several years despite booming demand

By Lauren Silva Laughlin   July 30, 2019  wsj.com

It is getting harder for U.S. natural-gas producers to see the glass as half full.

The price of the commodity has fallen more than one-quarter so far this year, losing 7% in the past 10 days and ending Monday at $2.12 per million British thermal units. That is despite this month’s heat wave in the eastern U.S. generating record consumption at power plants.

That seems surprising given all the new sources of demand for the relatively-clean-burning fuel. In 2018, global natural-gas consumption grew by an estimated 4.6%, according to the International Energy Agency. The switch from coal to gas accounted for over one-fifth of the rise in gas demand.

U.S. drillers are finding new markets. Exports were minimal before 2016. Since then, the U.S. has become the world’s third-largest exporter of liquefied natural gas, behind Australia and Qatar. On Monday, the U.S. Energy Information Administration released data showing that U.S. exports reached a new peak of 4.7 billion cubic feet a day in May 2019. There are also growing pipeline exports to Mexico.

The problem for producers is supply, not demand, and it is only going to worsen in the short run. Producers in West Texas, drilling primarily for oil, are getting natural gas as a byproduct in their drilling process. The resource is plentiful and cheaper than free—bringing it to market costs more than the market price. This spring, the price of natural gas at a trading hub near Midland, Texas, dropped to as low as negative $9 per million British thermal units.

The pricing reflects an infrastructure bottleneck, but the equation is changing. For example, a Kinder Morgan pipeline with 2 billion cubic feet per day of capacity is scheduled to enter service this fall, and the company has another pipeline scheduled for next year.

U.S. natural-gas demand, which reached nearly 30 trillion cubic feet in 2018, up from 22 trillion in 2005, when prices peaked at about seven times today’s level, is projected to grow by 7% a year in 2019 and 2020, according to EIA projections. That should slow considerably, but the agency doesn’t see prices rising consistently above $4 per million British thermal units before 2035, given ample supply.

Despite its usefulness, domestic natural gas is likely to remain cheap as long as geology can trump economics.