Natural gas demand is down, but producers can’t just turn off the tap

The United States has stored up a lot of natural gas this year. Last winter was the warmest on record in the contiguous 48 states, leaving the country with plenty of natural gas that wasn’t used to heat homes.

And while electricity demand is up this summer — as record heat drives up power use to run air conditioners — supplies of natural gas are still outweighing demand, keeping prices low.

Here’s the problem for natural gas producers who are trying to figure out how much gas the market wants: “If you drill a well today, you’re not going to see the gas associated with that well for another six to nine months,” said Samantha Dart, the head of global natural gas research at Goldman Sachs.

When demand and prices for natural gas spike, it takes a while for production to ramp up. And when prices start to fall and companies want to hold back supply?

“That’s all well and good, but I’m not going to see an actual decline in production for at least six to nine months,” Dart said.

So, when last year’s warm winter held back demand, companies couldn’t just turn off the switch.

“You just have, you know, a lot of natural gas molecules being produced, chasing really not a lot of demand,” said Ryan Kellogg, a professor at the University of Chicago’s Harris School of Public Policy.

To be clear, there is growing demand for electricity in the U.S. right now, he said. But even with some of the natural gas surplus being used to generate power, there’s still a lot left over.

“Barring something really unexpected happening, we should expect natural gas prices in America to stay fairly low to moderate, at least for the foreseeable future, as in the next year or two,” he said.

That’s good news for consumers who need to heat their homes in the winter — not so good for natural gas companies.  

But don’t feel too bad for the industry, said Anna Mikulska at the Institute for Defense Analysis.

“The ability of current U.S. industry to survive these prices is very different [than] what it was five or 10 years ago.”

Thanks to technology improvements and industry consolidation, she said, gas companies can still make money even when prices are low.