Natural Gas and its Rare Price Levels

By Asseged Major

Natural Gas Prices - Low Prices

​Natural Gas Prices are currently trading at around multi-record low prices. Natural Gas Prices have tested similar record lows throughout different years, trading below $ 2 Range.  During the Covid Outbreak the spot Natural Gas Price reached low of $ 1.42 . On March 13th,  Natural Gas Price reached below this level at $ 1.25 . Currently the spot Natural Gas Price is trading at around $ 1.55  ( Look at Figure 1 ) .  

Figure 1 – Daily Average Spot Price of Natural Gas (Henry Hub)

( Data : EIA , as of 3/20/2024 )

What is Causing Natural Gas Prices to Decrease ?

2 Main areas are causing Natural Gas Prices to decrease , it is .....

- Mild Winter Weather ,
- US Record Oil & Gas Production in 2023 

Mild Winter Weather 

US is biggest Producer and Consumer of Natural Gas in the World

​The United States is the Biggest Producer and Consumer of Natural Gas. The United States both for Production and Consumption have a World Market Share of over 20 % , which is the Highest. The Second in this category is Russia, which is below in the double digits, then after Russia all the other countries are in the single digits for world market share for Production and Consumption. The United States market has a significant size influence in the Natural Gas Market ( Look at Figure 2a and 2b ).

Figure 2a - World Natural Gas Production 

Figure 2b - World Natural Gas Consumption 

( Data : BP Statistical Review of World energy 2022, Data Year : 2021 )

Warm Winter Increasing Natural Gas Inventories

• In the United States Natural Gas is used in a wide variety of ways as a source of energy. In the United States, the Primary uses are in Electricity Generation and Heating. In terms of a heating source energy, 52 % of US Households use Natural Gas for Space Heating.

• Thus Far in the US Winter season (Nov - March), It has been a mild winter temperature season. In the United States there has been 8 % fewer heating degree days than the 10-year average .

• The warmer winter temperature has caused US Households to use less heating than normally, which has decreased their heating utility bills for this winter season. For the completion of the Winter season, the EIA expects the calculated consumption of Natural Gas to be about 3 Billion Cubic Feet per day, which is 9 % less than the previous 5 Year Winter Average. Because of the warmer Winter season, there is less consumption of Natural Gas, this is one of the reasons that has led to an increase in Inventories of Natural Gas.

• The EIA expects for the completion of the Winter season (Mar 31), that inventories will total 2.31 Billion Cubic Feet, which is 41 % above previous 5-year average for the month of March. This increase in inventories has caused a substantial increase in the Supply of Natural Gas in storage, which has decreased the price of Natural Gas .

( Data : EIA , EIA SEO, EIA Nat Gas Weekly )

US Record Oil Production in 2023

Natural Gas is also produced as a by-product from the Oil Production Process. When Oil is extracted from the ground, it often contains Natural Gas. From the process of Oil Extraction, more Natural Gas can be produced. The increase in Production of Oil, the increase in Supplies of Natural Gas. 

​In 2023, the United States produced a Record Amount of Crude Oil. In the United States, Crude Oil was produced at an average of 12.9 Million Barrels per day which is a record high, surpassing the previous record in 2019 at 12.3 Million Barrels per day. This is the Highest Production of Oil per day for any country in the world in History. Second was Russia at 10.1 Million Barrels per day, and third was Saudi Arabia at 9.7 Million Barrels per day, Look at Figure 3 .

Figure 3 - Average Crude Oil Barrels produced per day by Country ( in Millions of Barrels per  day )

( Data : EIA , International Energy Statistics )

US is Largest Oil Producing Country in the World 

​Since 2018, The United States has been the largest Oil Producing Country in the world, exceeding Russia and Saudi Arabia, Look at Figure 4.

Figure 4 - Oil Production by Year

​( Data : EIA , International Energy Statistics )

Fracking Increased US Oil Production 

This has been due to the increase in Oil Production from Shale Oil using Hydraulic Fracking from the last 15 - 20 years. Hydraulic Fracking technology uses high temperature liquid pressure to extract Oil from Shale rock sediment. The percentage of US Oil produced from Fracking (tight oil) has increased at exceptionally Large rate within the last 15 years, in which currently as of 2022, the majority of Oil produced in the US is from fracking, in which 66 % of all Oil Produced in the United States is from Fracking, Look at Figure 5 . ​

Figure 5 - Fracking 

( Data : EIA,  USAFacts ) 

US Record Natural Gas Production in 2023

​In 2023, the United States produced a Record High Amount of Dry Natural Gas. In the United States, Dry Natural Gas was produced at an average of 102.2 Billions of Cubic Feet per day in 2023, which is a Annual record high. In December of 2023, Dry Natural Gas reached an all-time High Record for production in a month at 105.5 Billions of Cubic Feet per day. Look at Figure 6.

Figure 6 - Average dry Natural Gas produced per day in US ( in Billions of Cubic Feet per day )​

                                            ( Data : EIA )

Europe Dependency on Russia Energy Imports

​The European Union (EU) countries import at about 55 % of its Energy, and at the end of 2022 it reached 62.5 % ( Data :  Eurostat ) 

Europe Sanctions on Russian Crude Oil and Natural Gas

​From the Russian invasion of Ukraine started in February 2022, and the war, which is still ongoing, the European Union (EU) have put sanctions and made efforts to decrease imports of Crude Oil and Natural Gas from Russia to European Countries. This is a very impactful change in Europe Energy Trade, as Russia was the leading Trading Partner of Crude Oil and Natural Gas to Europe. 

Europe Oil Trading Partners, Before vs After ( Russian invasion of Ukraine )

​Before the invasion, at the End of 4th Quarter 2021, the biggest Petroleum Oil Trading Partner with the European Union (EU) was Russia at 27 %, and the United States at 8 % . After the Russian invasion of Ukraine in February 2022, Sanctions, and efforts of using other Trading Partners from the European Union took effect, by the end of 4th quarter 2023, the biggest Petroleum Oil Trading Partner was the United States at 15 %, than Norway at 11 %. Russia was cut down to a very tiny fraction to 3 % ( Look at Figure 7 ). 

                                                              ( Figure 7 )

Europe Oil Trading Partners , Before vs After ( Russian invasion of Ukraine )

( Data : EuroStat ) 

Europe Natural Gas Trading Partners, Before vs After ( Russian invasion of Ukraine )

As assumed, the same scenario has played for imports of Natural Gas for the European Union. Before the Russian invasion, at the End of 4th Quarter 2021, the biggest Natural Gas Trading Partner with the European Union (EU) was Russia at 33 %, and the United States at 12 % . After the invasion, the biggest Natural Gas Trading Partner was the United States at 22 %, then Norway at 21 % , and Russia reduced to 13 %, ( Look at Figure 8 ).

                                                                ( Figure 8 )

​Europe Natural Gas Trading Partners, Before vs After ( Russian invasion of Ukraine)

​( Source : EuroStat ) 

Increased US Exports of Oil and Gas to Europe

​For both Oil and Natural Gas, the United States has doubled its share of imports as a Trading Partner with the EU within 2 years, and Russian imports to the EU have been drastically reduced. The European Union has looked to other countries to purchase Oil and Natural Gas imports with the United States being the largest seller to replace Russia for Oil and Natural Gas. This has caused US Oil and Natural Gas Producers to increase the supply of Oil and Natural Gas to record levels to meet the buyer demands from the European Union (EU) countries, in addition to domestic demands.

Largest Share of US Exports of Crude Oil is going to Europe

​For the Full Year of 2023, US Crude Oil Exports have reached a record high at 4.1  Million Barrels per day. The largest share of those Crude Oil Exports is going to Europe at 1.8 Million barrels per day, Look at Figure 9.

                                                                   Figure 9

( Data : EIA , Petroleum Supply Monthly )  

US Largest Exporter of Liquified Natural Gas to Europe

​For the Full year of 2023, the US exported the most in Liquified Natural Gas to Europe at 7.1 Billion Cubic Feet per day, this is around 200 % increase from 2021 when the United States was exporting 2.4 Billion Cubic Feet per day to Europe, Look at Figure 10 .  

                                                               Figure 10

( Data : EIA , CEDIGAZ , GIIGNL )  

Spread : Brent Crude Oil Price - WTI Crude Oil Price

Brent Crude Oil : Globally, Brent Crude Oil price is used as a benchmark to price over 3/4ths of traded Oil in the world. Brent Crude Oil is produced in the Northern Sea off the shores in Europe. Its efficient transportation location makes it convenient for delivery to other parts of the world and has lower transportation costs . (Data : ICE)

WIT Crude Oil : In the United States, WTI Crude Oil Price (Western Texas Intermediate) is used as a Benchmark to price Oil. WTI Crude Oil is produced in the Permian Basin in West Texas and parts of New Mexico. Its transportation costs are more expensive for further distance locations in the world due to shipping of WTI Crude Oil coming from on land locations. 

Oil Type : Both Brent Crude Oil and WTI Crude Oil are same category of Oil which is “ Light and Sweet Crude Oil”. ​

International Oil Pricing vs. US Oil Pricing 

International Oil Pricing  : Brent Crude Oil Price represents more so international oil pricing market (Europe, Africa, Middle East), 

US Domestic Oil Pricing : and WTI Crude Oil more so represents the United States domestic oil pricing market.

Brent Crude Oil & WTI Crude Oil Price Break

​Up until around 2011, the Price of Brent Crude Oil and WTI Crude Oil were around nearly the same level, where Brent Crude was just slightly lower in price. But as More Supply of United States Oil came into the market from Shale Fracking, in 2011, WTI Crude Oil Price became significantly and consistently lower than the Brent Crude Price ( Look at Figure 11 ) . Since then, this Price relation has continued to hold. 

Figure 11 - Brent Crude Oil Vs WTI Crude Oil (  Blue = Brent Crude , Green = WTI Crude   )

( Data : Yahoo Finance , Futures , Date : 3/18/2024)  

US Exports Benefit from Increasing Oil Price Spread (Brent Crude Oil - WTI Crude Oil )

​The price spread between Brent Crude Oil and WTI Crude Oil can be an indicative metric to monitor regarding US Exports of Crude Oil. The Larger the gap in Price from Brent Crude Oil and WTI Crude Oil, the more selling of Exports for US Crude Oil and Natural Gas. The Higher the gap in price of the spread, would mean Brent Crude Oil has gained more in price than usual, and is becoming increasingly more expensive than WTI Crude Oil Price. The Higher this gap, the more beneficial it is for US WTI Crude Oil Exports.

EU Sanctions on Russia Increase Oil Price Spread (Brent Crude Oil - WTI Crude Oil)

​When there are Geopolitical events that affect regions and countries that are significant to the international oil market, the price of Brent Crude Oil Price tends to increase drastically. Since WTI Crude Oil price at this stage would be at cheaper price than usual relative Brent Crude Oil, Foreign buyers increase more of their purchasing of WTI Crude Oil and less of Brent Crude Oil. This is what has occurred in Europe during the time of the Russian invasion of Ukraine and afterwards, where periods of Larger Gaps of Price spread of Brent Crude Oil and WTI Crude Oil emerged, European countries increased imports from US Oil Producers. The cheaper price of WTI Crude Oil relative to Brent Crude Oil, incentives US Oil Producers to produce more production to meet the Global Demand, which ultimately increases Supplies of Oil and Natural Gas. Look at Figure 12. 

Figure 12

​( Data : Yahoo Finance , Futures , Date : 3/22/2024)  

Natural Gas Market Outlook

• Warmer Winter Weather : A Mild Winter weather has increased Natural Gas Supplies, this with a combination of Europe switching from purchasing Crude Oil and Natural Gas from Russia to other countries, with the United States being the leading trading partner has increased US Production of Crude Oil and Natural Gas Supplies.

• Record US Oil Production : The international Cartel of OPEC has been continuing to make Oil Production cuts to increase the price of Oil. At the same time, the United States is now the leading Oil Producer in the world, and has made record high levels in Oil Production in 2023 for any country in world history, which has offset and compensated the production cuts that come from OPEC, which has further increased the Global Supply of Oil more than OPEC likely expected.

• Low Global Economic Growth : In contrast to the United States, the Global Economic backdrop for many parts of the world is currently slow to stagnate economic growth. In Europe, South America, Japan, China have experienced slow to stagnating economic growth. In North America, even while the United States has been experiencing strong economic growth, the bordering countries of Canada and Mexico have been experiencing slow economic growth. If this type of economic environment continues, it will be harder for prices of Crude Oil and Natural Gas to sustain upwards in slow and stagnated growth economies. 

• Recent US Oil Inventories Decreasing : More recently US Crude Oil inventories have been decreasing. This is signaling an increasing domestic buyer demand for Oil in the United States. In the Summertime, Oil Demand and Prices tend to be the highest since many people travel. Oil producers will be ramping up supplies to prepare ahead for the summer season. This would further increase the already excess supplies of Natural Gas and put pressure on further decreasing the price of Natural Gas.

• Natural Gas Companies Cutting Production : Many of the Natural Gas Producing firms that increased production when Natural Gas prices were much higher cannot make a profit by selling at these low levels. In response, some of the largest Natural Gas Producing firms have stated to cut further production of Natural Gas until prices increase to a higher level. This would reduce any planned future supply and can help ease the decrease in Natural Gas prices and move it higher. But any sustainable medium term to longer term increase in Natural Gas prices would have to be aided by stronger demand factors to clear the supply. 

Performance Notes : Based on Proprietary Returns
Disclaimer : Past Performance is not necessarily indicative of Future Results
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