Why Don’t M-U Drillers Drill More? It’s All About that Curve
A few weeks ago MDN tackled the question of why natural gas producers, in general, are not drilling more given the high price of natural gas right now (see With NatGas Prices This High, Why Aren’t Producers Drilling More?). Today we’re back with additional enlightenment on that topic, focusing on Marcellus/Utica drillers in particular. Based on comments made yesterday by Range Resources’ COO Dennis Degner (see today’s companion article), it’s obvious that M-U drillers are not expanding their programs this year, and even next year, because of the shape of the “forward curve”…
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Although Federal Energy Regulatory Commission (FERC) Chairman Richard “Dick” Glick is a nutty leftist, he’s not stupid. Glick can see that within a month or two there will be widespread shortages of natural gas available to feed gas-fired power plants, particularly in places like New England. Glick has voted against every single interstate pipeline project to come before him over the last three years he’s been a commissioner, claiming the pipes would contribute to mythical global warming. Now his actions are beginning to bite him on the rump with coming shortages. So what does he do? He blames LNG exports and tells power plants they better grab all the gas contracts they can now, so they can keep operating this winter.
This is an avoidable tragedy and very angering. Once again it looks as though Boston and the New England region will be hit with extremely high natural gas prices and will be forced to import LNG, most likely from Russia, to meet the region’s demand for natural gas. So says the Democrat-controlled Federal Energy Regulatory Commission (FERC). Meanwhile, the Marcellus Shale in Pennsylvania sits a couple of hundred miles away with more than enough gas to meet New England’s natgas demand, but we can’t get the gas there because pipelines have been blocked (by the Democrats who control New York and New England) and because rail shipments of LNG are blocked by executive orders from Joe Biden. We can’t even ship it there via LNG tankers because of the idiotic Jones Act.
Three weeks ago MDN told you that propane prices at both the wholesale and retail level were going through the roof (see 
The benchmark NYMEX natural gas futures price at the Henry Hub lost ground for the second day yesterday, slipping below $5/MMBtu for the first time in nearly a month. The NYMEX was down 69.80 cents or 12.27% over the last two trading sessions. Ouch. However, we shouldn’t be surprised. And we don’t expect it to stay down long. The main reason for the loss is the weather–as in the forecast says we can expect warmer weather will be with us, at least in the northeast, until early November.
Each month the U.S. Energy Information Administration (EIA) issues a Short-Term Energy Outlook (STEO). In the latest STEO update, released two days ago, EIA predicts the Henry Hub spot price will average $5.80/MMBtu in 4Q21, which is $1.80/MMBtu higher than EIA forecasted in their September STEO (see 
In recent weeks we’ve been asked the same question by MDN subscribers several times: “With the price of natural gas through the roof, why aren’t Marcellus/Utica drillers drilling more?” In a word, it’s because of hedging. Most drillers have hedged, or pre-sold under contract, most of the output they plan to produce for the balance of this year–at prices MUCH lower than those we’re seeing right now. There is no incentive to drill more. “Fine, but couldn’t they just drill more and sell the new output that’s not hedged at the higher spot prices we see now?” They could, except to drill more means they need more capital (money) to do the drilling, violating their announced budgets (their “guidance”) and violating the expectations of touchy investors and stockholders. Public companies are boxed in. Their hands are tied.
Comrade Joe Biden has painted himself into a corner. As Biden entered office, the United States of America was, after more than 50 years, energy independent. Upon seizing power, Biden canceled the Keystone XL pipeline from Canada and illegally banned federal oil and gas leasing. Now we have an oil and gas shortage and Biden is begging OPEC+ to increase production. What a dunce. This is how inept socialists are. So what can Biden do to get himself out of the corner he’s painted himself (and us) into?
It has been a wild ride on the NYMEX natural gas futures roller coaster this week. Record highs and record drops. Natural gas shortages in Europe and Asia are forcing prices to spike in the U.S. Yesterday the U.S. Energy Information Administration (EIA) reported a “very ugly” (as in high) storage report of 118 Bcf (billion cubic feet) of natural gas injected last week, which was 10 Bcf higher than most experts thought it would be–and yet all that extra supply didn’t move the needle on the NYMEX price which closed the day even from the day before, closing at $5.68/MMBtu.
Although the U.S. is a big and getting bigger exporter of natural gas, it’s not the biggest exporter of natgas in the world. The distinction of being the biggest exporter of natgas in the world goes to Qatar. Saad al-Kaabi, Qatar’s Energy Minister and CEO of Qatar Petroleum, said yesterday natural gas prices have reached “unhealthy levels” for both producers and consumers. Asia’s spot LNG prices soared by 40% on Wednesday as a cargo for delivery into North Asia in November was priced as much as $56/MMBtu–a record high that beat the previous record from last week of $34.52/MMBtu.
Hold on–it’s a wild ride! Natural gas reaches a record high two days ago, only to be followed by an 11% drop the very next day. Comments by Russian dictator Vladimir Putin sent the U.S. NYMEX natural gas price down 11% in one day. Yeah, just a stray comment by old Vlad had massive power over *our* natural gas market. How? Putin publicly stated he’s going to open up the taps and flow more gas to Europe. What a guy–Europe’s savior.
Natural gas futures jumped to the highest settlement price in 12 years–$6.31/MMBtu–as global gas supply shortages stoke concerns about U.S. shortages coming this winter. Spot prices for physically traded gas also jumped yesterday. The NGI Spot Gas National Avg. was up another 32.0 cents to $5.970. Overall production dipped a bit yesterday helping to feed the fears.
Could the current high price of natural gas, and the trading of natural gas, lead to a financial markets meltdown? Er, perhaps not right now, but if the price continues to climb out of sight, who knows? Reuters is reporting top commodity trading houses are being told by brokers and exchanges to deposit “hundreds of millions of dollars” in extra funds to cover their exposure to soaring gas prices. The good news (for now) is that most of them have the cash to do it.