Current State of the Market: Natural Gas Prices Are Down
Posted July 11, 2019
The sight of a drilling rig in Ohio may cause you to determine oil is being extracted, but most of the drilling taking place in eastern Ohio today is focused on natural gas in the dry gas window. Over the past decade, energy companies have increasingly developed natural gas in the area because of its abundance in the Utica Shale formation and advances in industry technology.
With the uptick in natural gas activity, more landowners are leasing their mineral rights to energy companies in the hopes of making some extra money, but the amount of money that can be made isn’t solely determined by the amount of minerals below the ground. It’s also determined by how much those minerals are worth on any given day.
Here is what’s going on with natural gas prices right now, and, if you have leased your mineral rights, how it may affect your royalties.
What’s going on with natural gas prices right now?
Right now, natural gas prices are depressed. Currently the NYMEX Henry Hub natural gas prices are trading around $2.20 per MMBTU. At the beginning of this year, they were above $3.00 per MMBTU, which means prices have dropped more than 25% over the past six months. Prices typically fall slightly in the summer months, but this is a higher-than-average decline.
What’s the reason for these plummeting prices?
It’s really a simple matter of supply and demand. Right now, there is a good supply of natural gas nationwide so the demand for more just isn’t there. When the storage tanks are full, the value dips. When the supply begins to decrease, the demand increases, and the value rises. We haven’t seen that happen in the past few months because the supply continues to outweigh the demand.
How does the climate impact the value of natural gas?
Temperatures play a big part in natural gas usage. We’re coming off a pretty mild winter that didn’t produce extremely low temperatures or extended cold streaks across the country. That means people didn’t need to heat their homes as much as they would have in a colder, more brutal winter season. As a result, less natural gas was consumed, and supplies were not over-taxed.
Now that we’ve arrived in the summer months, the heat-up has been a slow one. So far, it’s been a fairly mild summer with cooler-than-normal temperatures nationwide. People are not cooling their homes as much as they would be in a hotter summer, which also leads to less natural gas usage.*
*You may be thinking to yourself: I understand that people use gas to heat their homes in the winter, but don’t they mostly use electricity to cool their homes in the summer? The answer is yes, but many of the power plants that supply electricity to homes generate the electricity by using natural gas as fuel. Therefore, as more electricity is being consumed, more natural gas is needed to power these plants.
If cooler temperatures continue this summer, there could also be a ripple effect on the natural gas market moving forward. Typically, the increased electricity usage of the summer season increases the demand for natural gas, which normally causes natural gas prices to increase.
Does the market price of natural gas affect a landowner’s receipt of royalties?
When natural gas prices decrease, it will negatively affect your royalty payments. If you are a landowner receiving royalty payments, you are probably already noticing this. As mentioned above, most of the activity taking place right now in eastern Ohio from energy companies is in the dry gas window, so the falling natural gas prices are negatively affecting the royalties of most landowners in this area.
How long will this low-price environment continue?
It is never easy to predict when prices will recover. Based on NYMEX Henry Hub natural gas strip price “futures” as of July 2, 2019, prices for the next two years are forecasted at a low of $2.22 per MMBTU and a high of $2.68, with an average of approximately $2.50 per MMBTU.
There’s a domino effect that happens if prices stay low for an extended period of time, too. You’ll notice fewer drilling rigs as companies slow down their activity due to the low-price environment. Drilling and infrastructure will be delayed until prices recover.
How does selling your mineral rights help protect you from market volatility?
The gas and oil markets can be roller coasters. When prices are high, optimism is high that they will keep rising, but then a factor like an unseasonably cool summer suddenly brings them back down. When they fall, they tend to fall in a hurry, which decreases landowners’ royalty payments on their leased mineral rights.
One of the benefits of selling your mineral rights to Gateway Royalty for an up-front payment is that you eliminate the risk of falling prices. Since you receive a guaranteed payment up-front, a decrease in market prices will not be impactful because you have already been paid for your royalties. You are essentially locking in your price now to avoid any future market volatility.
Interested in learning more about selling your mineral royalties? Reach out to Gateway today to see if we can make you an offer.