2020 Industry Outlook: Will the Supply of Natural Gas Continue to Outpace Demand?
Posted January 13, 2020
A recent news release from IHS Markit, a company that provides information and analytics for industries like finance and energy, stated “U.S. Natural Gas Prices Will Fall to Levels Not Seen Since 1970s”. The release references a report finding that the oversupply of natural gas is likely to remain for the next couple of years even with high demand for the product.
Is this just an attention-grabbing headline or is it an accurate description of the current state of natural gas? And, if it is true, how will lower natural gas prices impact landowners in Ohio who have leased their mineral rights to exploration and production (E&P) companies? Let’s dive into the answers to these questions as we consider the outlook for the oil and gas industry moving into the new year.
How the price of natural gas has changed over the past year—and may continue to change
2019 started out great for natural gas prices. In December of last year, natural gas prices were over $4. That’s a great number. From January all the way through April, prices decreased a little but stayed fairly steady above $3. But then, towards the middle of the summer, prices really started to drop. We saw decreases of 30-40% until the price of natural gas came to hover just below $2—which is where it remains (at time of publication.)
Right now, the forecast from everything we’re reading and all the analysts in the industry is that we are probably going to continue to experience a low price in 2020. The expectation is that natural gas prices will stick around $2 for most of the coming year—though they could potentially drop lower.
So when do the experts predict the price of natural gas will start rising again? The IHS Market release suggests that an increased average natural gas price of $2.25 may not be seen again until sometime in 2021.
What factors are currently impacting the price of natural gas?
Right now, the natural gas supply in North America is exceeding the demand for it. In a nutshell, there’s too much gas sitting around and we’re not burning through it fast enough. Why is this happening? There are a couple of notable reasons.
Factor 1: Too Much Too Fast
The IHS Markit release quotes the company’s executive director, who states: “It is simply too much too fast. Drillers are now able to increase supply faster than domestic or global markets can consume it. Before market forces can correct the imbalance, here comes a fresh surge of supply from somewhere else.”
Over the course of the past decade, the Marcellus and Utica Shale has turned out to be a very prolific gas play. That is a great thing. America is the number-one producer of natural gas in the world. Production from thousands of wells across Ohio and Pennsylvania has led to a glut of natural gas. But the problem is, if the demand is not there, it’s a low-price environment. That’s where we’re at now.
Add into that equation the additional gas coming from the Permian Basin in the southwestern United States. The Permian Basin is one of the largest oil fields in the world. They probably have upwards of 400-500 rigs running throughout the entire basin. Those operators are drilling for oil—but a byproduct of that drilling is gas. So what that does is it adds more gas to a market that already has a full supply.
The oversupply doesn’t really affect the Permian operators in Texas and Oklahoma because their primary focus is oil. It has a much greater effect on the companies here in Ohio and Pennsylvania, in the Marcellus and Utica, whose main product is natural gas. When natural gas prices go down, their profits take a big hit.
Factor #2: Under the Weather
A lot of natural gas usage is weather-dependent. What you want is a really, really cold winter because that way natural gas gets used up. And then you want a really, really hot summer. That way people will be using gas (from power plants) during the summer to cool off their homes so there won’t be much excess gas left over to store for the winter. If that happens, once winter comes, you’re going to get an increase in price because there’s not enough gas to meet demand.
But that’s not what happened this year. We didn’t have a super hot summer and, as we mentioned, supply is running high. Everybody’s natural gas storage levels are filled up. When injection season comes, starting in October, November, and moving through the winter, there’s just not enough demand to meet the supply. So just like anything else in business, it comes down to basic economics. As a result of the lower demand, we’re going to see a lower price.
The only thing that the E&P companies can do to offset the lower prices is produce less gas. So now you’re seeing fewer rigs running in Utica. You’re seeing fewer rigs running at Marcellus. By drilling less, not as much gas is being developed. Less supply will go into markets besides what’s already there. As that happens, demand will increase slowly, and then gas prices will start to come back up. And as supply steadies and demand picks up, then we can get a better balance on that supply-demand curve.
How lower natural gas prices will affect Ohio landowners who have leased their minerals
If natural gas prices get down too low, it could reach the point where—even though Utica is a low-cost basin for an operator—it starts to become uneconomical to even drill a well. In that situation, companies will only drill what they have to in order to maintain operations and fulfill commitments. There’s not going to be any excess drilling. Instead, they’ll go wait out the low-cost environment until demand picks up and prices rebound.
For landowners who have leased their mineral rights to E&P companies and are hoping for royalties, a low natural gas price is not good news. For landowners whose property has not been drilled yet, low prices will likely mean a longer wait until drilling and production takes place. That means a longer wait until you receive any royalties. For landowners whose property has already been drilled, lower natural gas prices mean less profits for the company—which, in turn, means less royalties until prices rebound. In a lower-price environment, nobody wins.
In the oil and gas industry, there can be a lot of unpredictability from year to year. One of the reasons some landowners ultimately chose to sell their mineral rights or royalties to companies like Gateway Royalty is to avoid the risks of market fluctuations. Rather than rolling through the ups and downs the industry can bring—which can impact royalties in ways you can’t always anticipate—they choose to sell their interest for an upfront lump sum. Then, if prices do drop, they’re not affected because they’ve already been paid.
If there’s one thing that natural gas prices have shown this year, it’s that—when it comes to the oil and gas industry—you just don’t always know exactly what you’re going to get.
Learn more about why Ohio landowners choose to sell their minerals or royalties. Have additional questions? Reach out to us. We’ll do our very best to give you the answers.