Unseasonably High Temperatures and Surge in Supply... Weakness Likely to Continue
Industry Faces Wave of Bankruptcies... Domestic Investors Also Worried
Natural gas prices have approached their lowest levels in about 30 years. This is due to a sharp decline in demand caused by abnormal weather and a surge in U.S. production. Some analysts predict that the weakness in natural gas prices will continue for the time being, raising concerns about industry bankruptcies.
According to the Chicago Mercantile Exchange (CME), the benchmark Henry Hub March futures price closed at $1.61 per million BTU (British Thermal Units) on the 16th (local time). This represents a drop of more than 50% in just one month. Major foreign media reported that "except for a few days in mid-2020 when demand was depressed due to the COVID-19 pandemic, this is the lowest Henry Hub March futures price traded since 1995."
Europe's benchmark TTF price has also fallen 22% since the beginning of the year. Compared to the summer of 2022, when the energy crisis peaked due to Russia's invasion of Ukraine, it traded at 25 euros per megawatt-hour (MWh), less than 10% of that level.
Domestic investors are also dismayed. The 'Shinhan Bloomberg 2X Natural Gas Futures ETN(H)', which tracks twice the natural gas futures price, has plunged 35.8% this year and 54.3% in the past month. The 'Mirae Asset Natural Gas Futures ETN(H)' fell 19.1% and 31.3% respectively during the same period.
The decline in natural gas prices is attributed to a sharp drop in demand worldwide due to rising average temperatures. This winter, temperatures in most regions?including eastern Canada, northwestern Africa, the Middle East, Central Asia, and southern Europe?exceeded historical averages. According to the European Earth Observation Agency, the global average surface temperature last month was 13.14 degrees Celsius, breaking the previous record of 13.02 degrees set in January 2020 by four years. This is 1.66 degrees higher than the average for January from 1850 to 1900.
The significant increase in U.S. natural gas production is also cited as a factor putting downward pressure on prices. S&P Global Commodity Insights estimated that U.S. natural gas production exceeded 105 billion cubic feet per day in December last year, reaching record levels. Monthly production remained at last year's year-end level this month as well.
As a result, concerns about industry bankruptcies are mounting. There are even talks that natural gas prices are approaching the breakeven point. Comstock Resources, based in Texas, recently announced it would reduce its natural gas drilling rigs from seven to five and suspend dividend payments until prices rise. Antero Resources also cut its rigs from three to two and reduced its exploration budget.
Natural gas prices are expected to remain low. This is due to the anticipated continuation of abnormal high temperatures and substantial inventories in the U.S. and Europe. Commodity experts believe it will take considerable time to resolve the supply-demand imbalance and see little room for a short-term rise in U.S. natural gas prices. Charles McNamara, head of commodities at US Bank, stated, "To resolve the oversupply, prices will remain at low levels for the time being."
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