What Do Natural Gas Prices Below $2.00 Mean For Landowners?

Posted March 23, 2020

Natural gas prices have been on a rocky road recently. Since starting off 2019 trading at $3.25 per one million British Thermal Unit (MMBtu), prices have been on a downhill slope with last year closing out at $2.09 per MMBtu. Unfortunately, the outlook for 2020 doesn’t look much sunnier.

So far this year, NYMEX Henry Hub prices have bounced between $1.60 to $2.00 per MMBtu. In fact, the U.S. Energy Information Administration (EIA) reported natural gas had the lowest February prices in 20 years. And that was before the coronavirus disrupted the U.S. and global economies, adding to the air of uncertainty in the industry.

Where does this leave natural gas prices moving forward? What impact do sub-$2.00 gas prices have on landowners who have leased or are thinking of leasing their mineral rights? Let’s unpack the answers to these questions.

Why Natural Gas Prices Are Stuck Below $2.00

Natural gas prices are a function of supply and demand. When demand exceeds supply, prices go up; when supply exceeds demand, prices go down. Right now, there’s an oversupply of natural gas for a couple of key reasons:

  1. The huge increase in shale natural gas production over the past decade (sparked by activity in the Appalachian region)
  2. Milder weather during the recent summer and winter seasons (especially in the Northeast), requiring less heating and cooling

Because of these factors, there’s currently far more natural gas available than the market needs. According to Yahoo Finance, the U.S. produced “92.1 billion cubic feet a day (Bcf/d) of dry natural gas in 2019”. That’s a record-breaking number—though the record may be short-lived. Yahoo notes the EIA has forecast domestic gas production could jump to 95.1 Bcf/d this year.

Why Prices Are Unlikely to Break the $2.00 Mark Anytime Soon

Since there is so much natural gas in storage right now, the demand for the product is very low. Until the supply diminishes and the demand rises, it will be difficult for prices to break through the $2 ceiling.

There’s also the significant effect the coronavirus (COVID-19) is having on the U.S. and global economies. As a result of the virus and the shutdowns it has caused, markets and commodities almost across the board have experienced a negative impact with the nation likely headed for a recession.

At this point it’s hard to tell just how big of an effect the coronavirus will have on natural gas prices, which were already depressed before the emergence of the virus. But it is clear that COVID-19 will have some sort of impact—making recovery even more difficult for natural gas prices moving forward.

If there is a bright spot to be found on the horizon, it’s that weather does have the potential to help propel a quicker turnaround for natural gas. The Old Farmer’s Almanac has predicted a hotter-than-average summer for some regions like the Lower Lakes in its long-term forecast.

Why Is the $2.00 Mark Such a Big Deal?

When it comes to natural gas trading, what is it about $2.00 per MMBtu specifically that’s such a big deal? The short answer is, nothing really. It’s just a round figure that serves as a marker. When monitoring natural gas prices over time, investors know when prices hit that level it’s generally a sign of trouble in the market.

That’s why January saw many financial posts with headlines like “Natural Gas Could Soon Fall Below $2” and “Natural gas prices plunge below $2/MMBtu”. Historically, it’s a telling number because it doesn’t happen all that frequently. Between 2000 and 2018, there were only five years that saw natural gas prices dip below the $2 mark. Now it’s happened in two consecutive years with 2019 and 2020.

There’s also the psychological impact this number has on investors. They see that the price of natural gas is below $2 and they tend to stay away. The stock price of many publicly traded Appalachian Basin gas producers has been crushed over the last 18 months. Many investors have been scared away from investing in natural gas with such an abundant supply being produced in the United States. This type of thought process can contribute to keeping prices down.

What $2.00 Prices Mean for Landowners Who Have Leased Their Mineral Rights

If you are a landowner who has leased your mineral rights to an oil and gas company, you’re probably wondering how natural gas prices below the $2.00 mark will impact you. The answer is sub-$2.00 prices will likely lead to a reduction in the royalty checks you receive every month. It’s a simple formula really:

Lower natural gas prices = Lower royalty checks for landowners

If you’ve signed a lease with an oil & gas company but they have not yet started drilling on your land, at this point there’s a good possibility you could see a longer delay until production begins. Because of the oversupply and low prices, many companies are decreasing their shale activity right now. Unfortunately for landowners, that could mean a wait of months or even years until you get that first royalty check.

Wondering if the current low-price environment will affect your mineral royalties? Talk to the experts at Gateway Royalty today. We’ll be happy to take a look at your lease and help assess your situation.

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