U.S. natural gas supply balloons
Natural gas producers are bracing for a rough spring after a warm winter slackened demand and drove prices to near two-decade lows.
The winter of 2015-2016 wasn't cold enough to burn through a large surplus of the fuel, and U.S. production hit an all-time high in February. The combination means producers head into summer with plenty in storage and almost no hope for a recovery.
"It's bad," said Andy Lipow of Houston consulting group Lipow Oil Associates. Natural gas in storage "is a trillion cubic feet higher than last year. That says it all."
The low prices have crippled revenue at exploration and production companies that focus on gas, such as Chesapeake Energy, and amplified pain at others that pull it from the ground alongside oil. Simultaneously, cheap gas has spurred investment by chemical producers looking to harness the fuel as a feedstock or others looking to ship it abroad.
U.S. natural gas storage stands at 2.493 trillion cubic feet, almost 70 percent more than the 1.476 trillion cubic feet in storage at this point last year.
Traditionally, natural gas stores are built up in the summer and then drawn down in the winter, when the fuel is used to heat homes and generate power. But this year's winter was a no-show, and natural gas in storage hardly fell, meaning the caverns storing gas are already full heading into the injection season.
For the states farthest in the Northeast - Maine, New Hampshire, Connecticut and others - the months between December and February 2016 were the warmest since at least 1895, according to data from the National Oceanic and Atmospheric Administration. Other regions of the country didn't set records but were close. In Texas, only seven of the 121 winters in NOAA data were warmer than this year's.
Much of the warm weather can be explained by the strong El Niño recorded this winter. An El Niño, which is characterized by warm surface water in the Pacific Ocean, generally signals warmer weather across the Northeast, said Eric Berger, who tracks weather across the country and in Houston for Spacecityweather.com.
"Across the country, almost everyone had a warmer winter than normal, especially the Northeastern states," Berger said.
Colder weather in April could help bring temperatures more in line with historical norms, he said, but won't change the fact that this winter was unusually warm.
And in another bearish sign, the U.S. Energy Information Administration reported Thursday that the natural gas injection season had begun earlier than expected when it said gas storage grew by 15 billion cubic feet in the week ending March 18. Over the past five years, natural gas storage has fallen by an average of 23 billion cubic feet.
U.S. benchmark natural gas prices, set at Louisiana's Henry Hub, ended trading Thursday at $1.806 per million British thermal unit. So far in 2016, prices are down 22.7 percent, and on March 3, prices fell to $1.639, the lowest this point this century. The last time natural gas sold for this little was in 1999.
Low prices have done little so far to slow the torrent of gas produced, though there are signs production has peaked.
U.S. natural gas production hit an all-time high of 72.26 billion cubic feet per day in February, excluding production from the Gulf of Mexico and Alaska, according to energy analysis group Wood Mackenzie.
The surge has been driven largely by the gas-rich Marcellus shale near Pennsylvania, said Ryan Duman, an analyst at Wood Mackenzie, which has more than offset declines around the rest of the country.
"There are still areas in the Marcellus that are economic, though at this point you're talking about only the best of the best," he said.
But the Marcellus appears to have peaked recently, and U.S. production is expected to decline into the spring, Duman said.
That reversal has been heralded in part by a large pullback from drilling. The Baker Hughes rig count, which tracks active rigs across the U.S., has fallen to a low of 92 rigs as of March 24, down from more than 250 in March 2015.
Projects looking to harness the cheap gas are expected to begin coming online later in 2016. Among the first major new uses for the fuel is Cheniere Energy's Sabine Pass liquefaction terminal, which will super-cool U.S. gas and then ship it to power plants and other customers hungry to use the discount fuel across the globe.
The project's first train began liquefying gas in late February. When at full capacity years from now, six trains will be capable of absorbing about 3.5 billion cubic feet of natural gas.
The new demand for gas, combined with diminished production, could mean that today's gloomy market gets a little brighter, said Kyle Cooper, of energy consulting group IAF Advisors.
The short term will be still be tough, Cooper said.
"A year from now, I think things look much different," he said.