Feb 8 (Reuters) - U.S. natural gas prices plunged to a three-year low this week as production surged and mostly mild winter weather and recent liquefied natural gas (LNG) export plant outages depressed demand, prompting analysts to project some producers will cut back on gas drilling.
Any reduction, however, will likely be offset by increased associated gas production from oil wells as energy firms spend more to drill more oil wells with crude prices up about 7% so far this year.
"In our view, producers should likely be looking at activity reductions across all of 2024 given the current (gas price) strip outlook," Jake Roberts, an analyst at Perella Weinberg Partners' TPH&Co, told customers in a note.
Gas futures fell 5.0 cents, or 2.5%, to settle at $1.917 per million British thermal units (mmBtu) on Thursday, their lowest close since September 2020 for a second day in a row.
The collapse in gas prices came as producers were already upset that the nation's biggest source of gas demand growth, LNG exports, could be limited by U.S. President Joe Biden's pause on permitting new projects.
U.S. LNG exports have soared by an average of 34% a year over the past five years, while domestic demand for gas has only increased by about 2% a year on average over the same period, according to federal energy data.
Toby Rice, CEO of EQT, the nation's biggest gas producer, told a U.S. House subcommittee this week that the LNG moratorium has inserted "significant disruption, uncertainty, costs and risks" into the industry.
Analysts said that uncertainty will make it tougher for LNG buyers to sign long-term contracts needed to finance new export projects, which could reduce the need for more gas production in the future.
To be sure, the U.S. is the world's biggest LNG producer and will need more gas supplies to meet growing demand with LNG capacity expected to almost double from about 13.8 billion cubic feet per day (bcfd) now to around 24.5 bcfd by the end of 2028 as projects already under construction enter service.
One billion cubic feet of gas can supply about five million U.S. homes for a day.
Analysts have said the expected increase in U.S. LNG exports was the primary reason gas companies kept producing record amounts of the fuel in 2023 despite a 44% drop in prices, and it is why they were on track to keep pulling record amounts of gas out of the ground in 2024 and 2025.
Another factor weighing on the gas market this year has been abundant supplies of fuel in storage after a mostly warm winter kept heating demand low.
"As hopes for a cold end to winter fade, producers are looking around seeing who will blink and cut production guidance first," Eli Rubin, senior energy analyst at energy consulting firm EBW Analytics Group, told Reuters.
"With oil-driven associated gas taking cues from oil prices and impervious to natural gas, the onus of production cuts will likely fall on dry gas producers in the Marcellus and Haynesville," Rubin said.
Over the past year, U.S. drillers cut the number of gas rigs operating by 41, or 26%, leaving just 119 rigs operating at the end of January, according to energy service firm Baker Hughes .
Most of those cuts were in the Haynesville shale in Louisiana, Texas and Arkansas, which lost 27 rigs over the past year, and the Marcellus/Utica shale in Pennsylvania, Ohio and West Virginia, which lost 10 rigs. (Reporting by Scott DiSavino; Editing by Andrea Ricci)
