Viewpoint: US gas glut to weigh on prices

The 2019 surge in US natural gas production could keep the market well supplied through the winter, sustaining a gas glut and potentially weighing on prices this spring.

Annual US gas production has already hit new highs this year, averaging about 92.1 Bcf/d (2.6 bn m³/d), up by 10pc from a year earlier, according to government data. That sharp increase reflects the ongoing development of gas-rich formations such as the Marcellus and Utica shales in Appalachia and new pipelines that can ferry that supply to market.

Associated gas output has also surged as producers tapped oil-rich areas of the Permian basin in west Texas and southeastern New Mexico. Oil wells there often produce large volumes of associated gas and the Permian has emerged as the second-biggest gas field in the US by volume behind the Marcellus.

Supply gains have outstripped demand growth and the resulting deluge has allowed inventories to swell and eased concerns about the winter, a peak period for gas demand. Spot prices at the Henry Hub in November averaged $2.60/mmBtu, down by 36pc from a year earlier, even as heating demand increased and spurred withdrawals from gas storage.

Prices could fall further as production absorbs heating demand and limits the need for gas in storage.

"We believe prices may drop below $2/mmBtu this spring to force production out of the market," analysts with Tudor Pickering Holt said.

US gas inventories can insulate the market from weather-driven spikes in demand. Stockpiles as of 13 December were 3.411 Tcf — slightly lower than the five-year average but 22pc higher than the same week in 2018, according to the US Energy Information Administration (EIA).

The EIA has estimated that US stockpiles will move further above average levels as the winter progresses and supply remains near record highs.

US gas inventories are expected to exit winter at 1.9 Tcf, or 8pc higher than the five-year average. Inventories late last March fell to a low of 1.107 Tcf, or a third lower than average.

Those low inventories allowed spot prices at the Henry Hub to rise as high as 2.74/mmBtu in early April, the start of the so-called injection season, when gas stockpiles are replenished to meet winter demand. But prices may not rise that high this spring.

The prospect of low prices has forced some producers to rein in drilling.

Large gas producers such as Cabot Oil & Gas and EQT are planning to slow production growth next year on expectations for low prices in 2020. Lower output from that field could buoy prices.

By Jason Womack