Impact of Natural Gas Oversupply on Texas Energy Sector: Analysis and Implications
Long lines at gas pumps and skyrocketing prices are a few things that come to mind when someone says “crisis conditions” and “oil and gas” in the same breath. But recent expert predictions of too much supply have folks on alert. Specifically, an oversupply of natural gas has led to a different sort of crisis, with indicators so serious Morgan Stanley recently forecast a glut the likes of which has not been seen in decades. And The New York Times ran a headline “This Texas energy is so bountiful, they pay you to take it away.”
Matt Smith, energy analyst for Kpler, spoke with Texas Standard on what all this glut-talk means.
Texas Standard: Natural gas prices – tell us, how can we understand it as consumers? I really worry when I start to see prices go up; that usually means that there’s a pinch in supply. But natural gas is so abundant that it’s traded below zero for much of the year in West Texas. That doesn’t sound like a terrible thing from the consumer side.
Matt Smith: Well, there’s a couple of things going on here. So yes, there is the anomaly of negative prices happening in West Texas. That is simply because there isn’t the pipeline takeaway to get the gas out of there. And so there’s simply an isolated glut. But we look at U.S. prices on the whole, that Henry Hub benchmark, prices actually dropped below $2/MMBtu again this morning, which is great for us as you mentioned as consumers because natural gas is a key element and driver of power prices. But it’s not good for producers. And one situation we saw was we saw producers were cutting back on production back in the spring to try and lift prices. And that worked, but now as they put that production back online, we’re seeing kind of the whole cycle begin again and low prices.
I was thinking back to the start of the Russia-Ukraine conflict. And I remember these incredible predictions of natural gas prices rising to record levels and such. That didn’t happen. Why not?
Because we have U.S. oil production at 13.5 million barrels a day, basically at a record. And as you produce oil, you’re producing natural gas as well. And so as you go after the oil, it doesn’t really matter the price of the gas because, as long as it’s above zero, then you’re making a profit.
So even with U.S. LNG exports going up, there’s just too much and not enough demand, I guess, because of course, we’ve seen a warmer-than-typical winter, and here we are in the summer, right?
Well, actually, no. So the demand side of the picture is actually also strong. We have seen record demand this summer from utilities. And so natural gas actually has risen to close to half of the generation mix on a U.S. basis as coal continues to get squeezed out. And I think the challenge has been that LNG exports, they did push to a record in December 2023. But we’ve had maintenance issues and outages, which has meant that those exports have dipped this year.
What if you could do something about the storage issue? If you could store this LNG sufficiently, would that ease the glut?
Well, U.S. natural gas storage is also looking pretty strong right now. So it’s 7% above year-ago levels and 13% above the five-year average.
I’m just batting a thousand. I’m trying to come up with some way out here, but it sounds like it comes down to transportation – just getting the stuff out of West Texas for export.
Exactly. Yes. And we will see U.S. LNG exports increasing and pushing to a record into next year as we see LNG export terminals coming online. So we will see that increase coming through. It’s just been a little bit in check recently, and there’s just so much supply coming to market it’s just dwarfing things.
Let’s shift real quick to gasoline prices. How are we looking as Labor Day approaches?
Oh my gosh. So prices at the pump are at $3.35 on the national average. And in Texas, they’re at $2.94. And so we’ve seen them in the last month drop by $0.20. And they’re actually $0.50 down versus this time last year. And the drop we’ve seen recently has purely been driven by oil prices. We saw a $10 drop in oil since early July through mid-August.
But then just today, we’re seeing oil prices rallying on escalating tensions and airstrikes in the Middle East. And we’ve got Libya threatening to shut in production. So as we see oil prices rebounding again, that may stop the drop we’ve seen in prices at the pump.
As the oversupply of natural gas continues to impact the Texas energy sector, experts are closely monitoring the situation and its implications. The abundance of natural gas has led to a unique crisis, with predictions of a glut not seen in decades. This surplus has caused prices to plummet, with negative prices even occurring in certain regions due to a lack of pipeline infrastructure.
Challenges in the Energy Sector
Despite the low prices benefiting consumers, producers are facing significant challenges. The fluctuating demand and oversupply of natural gas have created a cycle of production cuts and price drops. While the demand for natural gas remains strong, issues with LNG exports and storage have contributed to the ongoing surplus in the market.
Implications for Future Energy Trends
Looking ahead, experts predict that U.S. LNG exports will increase, potentially easing the glut of natural gas in the market. However, transportation and infrastructure limitations continue to pose challenges for the industry. As global tensions and geopolitical events impact oil prices, the future of the energy sector remains uncertain.
In conclusion, the oversupply of natural gas in Texas has far-reaching implications for the energy sector. As experts analyze the market dynamics and explore potential solutions, the industry faces ongoing challenges in balancing supply and demand. Stay tuned for updates on the evolving energy landscape in Texas and beyond.
