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Appalachian shale drillers are getting squeezed by low prices, and a supply glut may mean that there is little prospect of a pricing rebound anytime soon.
Earlier this month, IHS Markit put out a press release entitled, “U.S. Natural Gas Price Will Fall to Levels Not Seen Since 1970s.” The firm said that persistent oversupply from the Marcellus would be “reinforced” by a surge in associated gas production from the Permian basin. That could keep average natural gas prices below $2/MMBtu next year, which would nominally be the lowest since 1995, but in real terms it would be the lowest since the 1970s.
The market is set to see falling prices despite structural increases in demand from new gas-fired power plants and LNG export facilities. IHS noted that U.S. demand has climbed by 14 billion cubic feet per day (Bcf/d) in annual consumption since 2017, but supply has expanded by even more than that amount since the start of 2018.
“It is simply too much too fast,” Sam Andrus, executive director of IHS Markit, said in a statement. “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.”
The bust in gas prices create significant dangers for gas-focused shale companies. “With the news from IHS Markit that natural gas prices in the United States will drop below $2 MMBtu in 2020 and remain low through at least 2024, if not longer, heads must be exploding in the board rooms of oil and gas producers throughout the U.S. and Canada,” Tom Sanzillo and Kathy Kipple wrote in a commentary for the Institute for Energy Economics and Financial Analysis (IEEFA).
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Last week, I touched on the issue of oil prices and demand stating:
“First, the development of the “shale oil” production over the last five years has caused oil inventories to surge at a time when demand for petroleum products is on the decline as shown below.”
“The obvious ramification of this is a “supply glut” which leads to a collapse in oil prices. The collapse in prices leads to production “shut ins,” loss of revenue, employee reductions, and many other negative economic consequences for a city dependent on the production of oil.
Secondly, I have also discussed that the “fracking miracle” may not be all that it is believed to be due to fast production decline rates and massive amounts of leverage. Just recently Yves Smith posted an article discussing this very issue stating:”
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