A rig drilled for natural gas at an EQT Corp. site in Pennsylvania in 2013. The producer has curtailed nearly 25% of the output from its wells in Appalachia.
Photo: Ty Wright/Bloomberg NewsEven the biggest producer in the country is backing away from the dismal market for natural gas.
EQT Corp. has curtailed nearly 25% of the output from its wells in Appalachia, holding it in the ground for when prices for the power-generation fuel aren’t so depressed. Given the way canceled orders are piling up for export cargoes of liquefied natural gas, it may be a while.
Natural-gas futures for July delivery fell 2.8% to $1.83 per million British thermal units on Thursday, down 29% from a year ago and well below what is needed to cover production costs for many companies.
Thursday’s decline accelerated after the U.S. Energy Information Administration reported inventory levels rose last week by slightly more than analysts had expected to bring stockpiles 42% above the year-ago level.
A month ago, natural-gas prices appeared ready to pop. Major producers, including EQT, had cut back on drilling in response to falling prices. Meanwhile, a historic crash in crude prices prompted drillers to shut in oil wells, which produce a lot of natural gas as a byproduct. And it was coal, not natural gas, that bore the brunt of the reduced demand for electricity during the coronavirus pandemic. On May 5, natural-gas futures nosed above $2 for the first time since January.
The rallies have been fleeting, though. Mild May weather has limited domestic demand, brimming storage facilities abroad have reduced exports and the flow from oil wells hasn’t declined by as much as expected. Plus, oil prices have been rising, suggesting that the crude curtailments won’t last long.
Prices made another run higher before Memorial Day and the arrival of summer weather that had many Americans switching on air conditioners.
Analysts also credit EQT’s big production cut, which the Pittsburgh company’s pipeline arm disclosed in a securities filing early last week. The parent company said Tuesday that the curtailments of 1.4 billion cubic feet a day began on May 16 and could last through June, depending on prices.
Prices aren’t expected to go much higher this summer. Goldman Sachs Group Inc. analysts forecast an average summer price of $2.04, though last week they warned clients that prices could fall below $1.50 if domestic demand fails to pick up, production remains apace and overseas buyers keep canceling orders for liquefied natural gas, or LNG.
Such shipments have helped balance the U.S. market, though the pandemic has sapped global demand for shale gas and bloated stockpiles in Europe and Asia, which were already robust after a mild winter left unburned a lot of gas meant for heating.
The main European price, set in the Netherlands, plunged to $1.13 last week, down roughly 75% from 2019’s average of $4.87, according to JPMorgan analysts. The Asian benchmark, which traded above $10 two years ago, dropped to $2.11 last week.
The collapse has prompted a rash of cancellations for LNG deliveries. The daily volume of natural gas purchased by U.S. export facilities has declined by about one-third to 6.5 billion cubic feet this week, from more than 9.6 billion cubic feet at the end of March, according to S&P Global Platts.
LNG demand is poised to fall further, said SunTrust Robinson Humphrey analyst Welles Fitzpatrick. He has counted 45 canceled shipments in July, from buyers ranging from commodity-trading firms to utilities in Japan. The lost orders would reduce the amount of gas absorbed by export terminals to less than 4 billion cubic feet a day, Mr. Fitzpatrick estimates.
Forecasts like that have made it difficult for traders to gauge the direction of prices at a time of year when the arrival of hot weather should lift demand for electricity to power air conditioners.
In February, hedge funds and other speculators had built up the biggest short position, or bets that natural-gas prices would fall, on record, according to Commodity Futures Trading Commission data. That trade was unwound in late April but since then traders have waffled between going long, or betting that prices will rise, and short, the opposite.
Energy-trading firm Ritterbusch & Associates told clients in a note that it is betting on prices to run up to around $2.35 in the next couple of weeks as summer heat juices demand, but that the rise could again be short-lived.
“This market should still be viewed as a trading affair rather than one in which a long position can be established as a longer-term investment,” Ritterbusch said.
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Write to Ryan Dezember at ryan.dezember@wsj.com
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