US natural gas prices: déjà vu all over again

This time was supposed to be different. Last summer, the price of US natural gas hit a high of $10 per million British thermal units. The worry then was that Europe would run short of winter supplies as Russia cut its output in protest at sanctions.

Today, the price has fallen to just $2/mmbtu. Gas consumption in the US has hit a five-year low thanks to a mild winter. According to the US Energy Department, the country will finish March with more than 1.9tn cubic feet of gas in storage, a quarter more than the five-year average.

A massive production boom in the 2010s led to a glut, low prices and eventually financial distress for some businesses. Oil and gas drillers were forced into austerity by shareholders.

The Ukraine war followed. The US gas industry envisaged a golden era where output growth would be supported by sustained higher prices and profitability. It is turning into a long wait.

One optimist is Chesapeake Energy, a pioneer of shale drilling. It went bankrupt in 2020 but re-emerged and pivoted away from oil and towards gas. Its shares have fallen more than a quarter from their peak last summer. Chesapeake’s chief executive Domenic Dell’Osso told investors last month that the company had to manage through price volatility this year, but that the secular trends supported natural gas as a winning commodity.

His thesis depends in part on the volume of LNG export capacity the US is adding. The US only began exporting natural gas in 2016 and its current shipment capacity has already reached 14bn cubic feet per day, a figure set to jump to about 20bn cubic feet with the addition of three new export terminals.

The US Energy Department admits that its forecasts did not anticipate the scale of the current chill in natural gas prices. It may turn out to be no more than a quirk of the weather. But investors have been burned before by prophecies of secular tailwinds and new production discipline. They should retain their hard-won scepticism.