The United States has built up large reserves of natural gas this year. Last winter was the warmest on record in the 48 states, so the country still has plenty of natural gas left over that is not being used to heat homes.
And although electricity demand is rising this summer—record heat is driving up electricity use for air conditioning—natural gas supply still exceeds demand, keeping prices low.
The problem for natural gas producers trying to figure out how much gas the market wants is this: “If you drill a well today, you won’t see the gas there for six to nine months,” says Samantha Dart, head of global natural gas research at Goldman Sachs.
When demand and prices for natural gas skyrocket, it takes a while for production to ramp up again. And what if prices start to fall and companies want to hold back their supply?
“That’s all well and good, but I don’t expect there to be any real decline in production over the next six to nine months,” Dart said.
When last year’s warm winter slowed demand, companies couldn’t simply flip the switch.
“Large quantities of natural gas molecules are simply being produced, even though demand is not actually that great,” says Ryan Kellogg, a professor at the Harris School of Public Policy at the University of Chicago.
To be clear, there is currently a growing demand for electricity in the United States, he said. But even if some of the natural gas surplus is used to generate electricity, there will still be plenty left over.
“Unless something really unexpected happens, we can expect natural gas prices in America to remain relatively low to moderate at least for the foreseeable future, that is, the next one to two years,” he said.
This is good news for consumers who need to heat their homes in the winter – but not so good for natural gas companies.
But one should not feel too much pity for the industry, says Anna Mikulska from the Institute for Defense Analysis.
“The ability of U.S. industry today to survive these prices is very different than it was five or ten years ago.”
Thanks to technological improvements and industry consolidation, gas companies can still make money even at low prices, she said.
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