Natural gas surplus not going away

It’s been a tough summer, and an even tougher year for anyone selling natural gas.

Benchmark natural gas prices have fallen from last November’s $4 per million British thermal unit to today’s prices closer to $2 per million British thermal unit and three-year lows at the end of October. Even with winter — and the extra demand for natural gas that cold temperatures bring — right around the corner, few expect natural gas to mount a true recovery until the end of this decade.

Instead, the same enthusiasm for drawing natural gas from shale rock that launched a boom has transformed it into another bust. And so far, there’s little sign drillers are willing to pull back enough to cut off the surplus holding down prices.

The bust has had a powerful and mixed effect on Houston’s economy. Producers and the drillers who chase the gas have laid off workers and shrunk budgets amid falling rev-

enues from selling the fuel. Across town, chemical factories fueled by cheap gas are expanding and bringing on thousands of workers to build and operate systems.

The low prices are likely to be the norm until the end of the decade.

“There’s just too much production,” said Pearce Hammond, managing director at Houston energy investment bank Simmons & Co. International. “It’s certainly a very negative outlook for natural gas at this moment.”

The U.S. Energy Information Administration’s most recent data shows U.S. production climbing by 1.2 percent from 89.8 billion cubic feet in July to 90.9 billion cubic feet in August. Production growth has slowed somewhat, but is still about 7.2 percent higher than in August 2014.

There are other, more exotic problems for natural gas bulls as well.

Uncharacteristically warm ocean surface temperatures in the equatorial Pacific have created a strong El Niño effect this season. The weather pattern typically means warmer winter temperatures across parts of the northern U.S., which could mean much less demand in a region generally hungry for the fuel each winter.

To make things worse for natural gas bulls, the country is headed into the winter months with a record amount of gas in storage.

Storage is built up in the warmer summer months and drawn down in the winter, and how much is available has a major effect on prices. This summer, gas in storage rose to a record-setting 3.9 trillion cubic feet — enough to serve as a powerful cushion, even if weather turns out to be cold.

About the only positive sign for prices as winter approaches is that gas doesn’t have much further to fall, said Tim Evans, a commodities expert at Citi Futures. Traders have already set prices anticipating a warm winter, so cold temperatures could cause a larger shift up in price than warm temperatures would cause down.

“We’re very conservatively valued where we are now,” Evans said. “There’s at least some potential for prices to pop back up to a number like $3, maybe somewhere above $3.”

Still, $3 per million British thermal unit would be 25 percent cheaper than last year’s high. For a significant and sustained rally, Evans said, either production would need to fall off or demand would have to close the gap.

Demand is gearing up, but the needed growth isn’t quite here yet.

Several billion-dollar projects that will liquefy natural gas and ship it abroad are currently under construction across the country. Other projects, such as gas-consuming power and chemical plants, are also underway. And a portion of the U.S.’s gas is already making its way south to consumers in Mexico on newly built pipelines, with more expected to follow.

According to financial services firm Morningstar, those projects could contribute to an additional 22 billion cubic feet per day of additional gas demand, an about 20 percent increase from current levels. Simmons & Co. International forecasts that 21 billion cubic feet per day of extra gas will be needed by the end of 2020.

Most of the gain will come from liquefaction facilities enabling gas to travel abroad.

The first of those are slated to start shipping in 2016, when Houston-based Cheniere Energy completes the first phases of its Sabine Pass project along the Texas and Louisiana border.

Still, the full effect of that sink for U.S. gas isn’t likely to kick in for several years.

In the meantime, demand is being helped out some by some power plants forsaking coal to run generators on natural gas instead. That’s not a big boost either, and the effect is limited because generators would likely turn back to coal if gas prices did rise.

Overall, it’s a tough market for natural gas, said Jordan Grimes, a commodities analyst at Morningstar.

“The producers do expect lower for longer,” Grimes said.