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Dr. Ken Rietz All the news about natural gas seems to point to falling prices. The reasons are fairly standard: milder winter forecast, slowing Chinese economy, Middle East tensions decreasing, high storage, and assorted others. The obvious effect is lower prices for natural gas and therefore smaller energy bills, but very little is said about other effects. In this commentary, we look at consequences that are not part of the usual news cycle. First, let’s look at the declining prices of natural gas, specifically since early October. |
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Figure 1: The NYMEX front month natural gas futures, in USD per million BTU The obvious fact is that the most recent decline in natural gas prices is not very extreme compared to other places where the price has dropped. However, if accounting for inflation, the current prices hit a 30-year low earlier this year. Combine that with a much larger than usual amount of gas in storage for the past year, prices should be fairly low. But can the prices continue to drop? Of course, as natural gas prices drop, the less efficient wells will simply close. But there is a nearly free source of natural gas from oil wells; the natural gas was simply flared (burned) before but can be captured and sold now. But the amount of natural gas available that way can’t supply all the gas we use. At this time, about a third of the gas produced comes from oil wells. But it can, for the near term, keep gas prices low. One article expects that natural gas prices will stay lower permanently. The effects of lower natural prices on the gas industry are not initially positive. Beyond the closing of some wells, construction of new gas wells and plants will be scrapped or at least delayed. Some gas-consuming plants (such as electricity generation or LNG) might be started, but the time frames for such things are so long, they will move slowly and carefully, realizing that the price of gas can go up again. Additionally, LNG can soak up excess natural gas, for a world that is eager to buy it. The American Gas Association expects that the Henry Hub spot price will increase from $2.36 per million Btu (MBtu) in 2024 to $3.06 per MBtu in 2025, an increase of 29.7%. Contrast that with the EIA STEO prediction of natural gas costs going from $2.80 per MBtu in Q4 24 to $3.10 per MBtu in 2025, an increase of 10.7%. Companies will attempt to set up contracts with electric companies for electricity generated at a lower-than-usual price and let the electric companies worry about the price of gas. If the electric company makes extra profit because of low gas prices, it is good for them. In general, the consumers will feel some relief from all the other goods whose prices are climbing fast due to inflation. The global economy will shift, as necessary, to accommodate the lower prices if that is how they continue. The net reduction in inflation is difficult to predict. How then should we trade natural gas? If history is a guide, the high levels of inventory and the forecast of a mild winter, the drawdown on natural gas reserves will be less than usual. (I don’t think natural gas prices will stay this low forever.) This bodes well for a range of natural gas prices in the range of $2.25 per MBtu to $2.90 per MBtu into H1 25, with higher prices as 2025 finishes. |