Natural Gas Price Plunge Could Soon Lead To Shut-Ins
Natural gas prices plunged to new lows this week, falling below $1.50/MMBtu, a catastrophically low price for U.S. gas drillers. The factors afflicting the gas market are multiple. Prices had already fallen below $2/MMBtu at the start of 2020, weighed down by oversupply. But it wasn’t a problem confined to the U.S. There was also a global glut of LNG due to a wave of capacity additions in 2019.
That was the situation heading into 2020. But just as the Covid-19 pandemic tore apart the oil market, natural gas also went into a tailspin. Global gas demand is expected to fall by 4 percent this year, “largest recorded demand shock” in history, according to the International Energy Agency.
Buyers of U.S. LNG are now cancelling shipments at a rapid clip. U.S. LNG exports have declined by more than half compared to pre-pandemic levels.
“There would have been too much LNG in the world even without Covid-19,” Ben Chu, a director at Wood Mackenzie’s Genscape service, said in a statement. “Covid-19 has made it worse.”
Buyers abroad are willing to pay a cancellation fee instead of receiving shipment from U.S. exporters, a sign of how badly the market has deteriorated. For August delivery, between 40 and 45 cargoes have been cancelled, nearly double the rate of cancellation in June.
Typically, cheaper gas can stimulate demand, particularly in the electric power sector. But that outlet is not as large as it may have been in the past, not least because gas has already been cheap for quite some time. Thus, the coal-to-gas option is limited. Without an export route, and without larger uptake from utilities, the gas glut has deepened.
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