Carnage in US Natural Gas as Price Falls off the Chart

All eyes are on Chesapeake.

The price of natural gas in the US has gotten completely destroyed. The process started in July 2008, at over $13 per million Btu and continues through today, at $1.77 per million Btu.

In between, natural gas traded at prices that, for much of the time, didn’t allow drillers to recoup their investments, leading to permanently cash-flow negative operations, and now huge write-offs and losses, defaults, restructurings, and bankruptcies.

You’d think that this sort of financial misery would have caused investors to turn off the spigot, and for production to fall because drillers ran out of money before it got that far.

But no. Over the years, money kept flowing into the industry. In this Fed-designed world of zero interest rate policies, when risks no longer mattered, drillers were able to borrow new money from banks and bondholders and drill that money into the ground, and production soared, and more money poured into the industry based on Wall Street hoopla about this soaring production, and this money too has disappeared.

In the process, the US has become the largest natural gas producer in the world – and the place where the most money ever was destroyed drilling for natural gas.

But now the spigot is being turned off. And much of the industry is heading toward default and bankruptcy. Granted, the largest producer in the US, Exxon, has apparently bigger problems on its global worry list than the misery in US natural gas. Its stock is down only 25% since June 2014, and its credit rating is still AAA. But even if it gets downgraded a couple of notches, Exxon can still borrow new money to fund its operations, dividends, and stock buybacks, and service its existing debt.

But the rest of the industry – along with its investors and banks – is sinking deeper into fiasco.

A number of smaller natural-gas focused drillers have already sought refuge in bankruptcy court. The number 2 driller, Chesapeake, which gets 72% of its production from natural gas and 11% from natural gas liquids, has already written off $15.4 billion over the past three quarters! It’s currently trying to “restructure” its debt. Nearly $12 billion of it is junk bonds. Of them, $9.3 billion are unsecured. It has hired restructuring advisors Evercore Partners.

Unsecured bondholders know what that means: their illusions will disappear. And they’re sweating blood.

Chesapeake is currently engineering a bond swap which will make a big haircut for unsecured bondholders permanent. Its myriad bond issues have plunged in value. For example, the 6.5% notes due 2017 trade at around 55 cents on the dollar, though they’re included in the bond swap, according to S&P Capital IQ LCD, and the notes due 2019, also included in the bond swap, trade at around 30 cents on the dollar. Its stock has fallen 87% since June 2014, to below $4 a share.

Investors that stuck it out – or speculators that grabbed the opportunity of lifetime a few months ago – are toast!

Yesterday, natural gas briefly traded at $1.68 per MM Btu, and settled at $1.755 at the NYMEX, the lowest since March 23, 1999. Down 86% from July 2007. Down 60% from July 2014, when it traded above $4 per MMBtu. But even $4, given the costs of fracking, isn’t a survivable price regardless of the hype the industry has been proffering in order to attract new money. It has plunged 21% so far in December and 36% during the past two months.

Adjusted for inflation – math by the Wall Street Journal – the price of natural gas has fallen off the NYMEX charts, which date back to 1990.

This weekly chart shows the collapse of natural gas from the already deadly low price prevailing around June 2014:


In the winter, when natural gas is used for heating, the price tends to follow the weather, and now it’s balmy in much of the US, impacted by a strong El Niño. This comes after another year of record production that pushed storage levels at the beginning of heating season to new records, according to the EIA: 16% above last year and 9% above the five-year average. As this warm weather is expected to continue, the draw on storage might only be a fraction of normal for the near future.

Beyond heating? Throughout the year, demand for natural gas was up, largely on the soaring demand from power generators that have switched to gas from coal. Some of it was temporary as power generators with both gas and coal-fired power plants took advantage of the low price of gas. But some of it was permanent, as older, inefficient coal power plants that were too expensive to upgrade and retrofit were retired. Over the first nine months of the year, based on EIA data, power burn soared 18.5%.

And natural gas exports via pipeline to Mexico have soared after new pipelines started coming on line last year. For example in September, the latest month available, pipeline exports to Mexico jumped 40% year over year.

But it wasn’t enough to overcome soaring production. Given the ongoing carnage in the industry, production finally appears to be declining, but just barely. In September, production fell 0.6% from August. But August was an all-time record. And production in September was still 6% higher than a year ago.

Even as production may have dropped further in October and November, a grim reality remains: warm weather and record stockpiles. It leaves drillers in a world of hurt. They would need a miracle, a series of horrendous arctic cold waves that last into early spring and go all the way down to Florida and Texas. It might cause a price spike that would allow drillers to hedge at least some of their production at higher prices. But that miracle seems unlikely at the moment.

After eight trading days in a row of plunging, natural gas rallied 3.6% early Thursday, only to re-plunge and end the day down 2%. During those nine days, the price plummeted 20%. And today, not even a technical bounce gained much traction before giving up its ghost, with the price in late trading at $1.765 per MM Btu, up a measly 0.5%. Not even a technical bounce can be made to stick.

This carnage among investors in natural gas, oil, and other commodities is a consequence of the Fed’s strategy to flood the world with free money. It corrupted the way financial decisions are being made. And now, much of these investments have been shuffled off to folks who hold them in their mutual funds, retirement funds, pension funds, and the like, and they’re taking a licking, even worse than savers have had to endure for over seven years.

But now contagion is spreading to the broader goods-based economy. Read… Freight Shipments Hammered by Inventory Glut, Weak Demand

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  39 comments for “Carnage in US Natural Gas as Price Falls off the Chart

  1. Mike R. says:

    Fracking for natural gas and oil was considered a national priority after the economic collapse. It was supported to create jobs but more importantly to demonstrate energy independence (sort of).

    The Fed will bail this all out in the next QE.

    • CrazyCooter says:

      Cheap/free money begets mal-investment. No one can properly allocate capital when the price of money is a deception, thus capital flows to destruction, instead of *REAL* productivity.

      I would just take this opportunity to point out that, absent cheap money flowing into frack gas, conventional gas drillers had a market. They had customers, revenue, employees, and they paid taxes. Now they don’t.

      This is what is happening throughout the economy; real businesses are being destroyed by the transient free money businesses that ruin them (at the expense of investors). In the end, we will have *NEITHER*. Not their products, not their employee/labor base, not their taxes.

      We have collectively, from a monetary/economics standpoint, eaten our seedcorn. Winter is coming.

      Get out of debt. 100%. Learn to live on cash, from pay day, and still sock some away into savings.

      Stay mobile.

      Invest in REAL skills that improve your lot in life, your value to the marketplace, and be able to pack your possessions in your car … you know, your important stuff … to capitalize on opportunity.



      • SaveUs says:

        Excellent advice Cooter

      • Petunia says:

        To expand on your point of cheap money creating mal-investment, you can trace that back all the way to the 1980’s stock market craze. Most of the big box store chains were built out not on earnings, but on stock market investor money. This didn’t end with the financial crisis, it continued throughout the crisis. You can see it in the businesses that survived the construction bust. Cheap credit during the recession only expanded the practice to other businesses.

        I take exception to your advice to pay off debt in the face of a financial collapse. If you really do think the end is near, the last thing you want to do is use resources to pay down debt. You should be piling it on because who will be left to collect it.
        If you are unsure than by all means live within your means and stay mobile.

      • chris Hauser says:

        if you think you are going to be a refugee, you might as well get going.

  2. game over says:

    game over,last one out hit the lights

  3. commodities blood bath says:

    fed interest rate hike sealed commodities fate,now their is no floor (0).unless they’re bailed out to the tune of 1.5trillion,prepare for massive liquidation and write offs not seen since,well ever.old boy hamm gonna regret writin his old lady that 1 billion dollar check

    • chris Hauser says:

      she called the top, didn’t she?

      wildcatters always think they’re going to the moon.

  4. James says:

    The US fed is no doubt financing the Oil/Gas Companies in order to make life hard for Russia -perhaps with an under the counter refund of losses. There is no other reason why these companies are still operational. I’m hoping it all blows up in their face.

    • night-train says:

      James, the Fed is certainly guilty of many sins, but not the one you suggest. Oil and gas E&P companies drill for and produce oil and gas as long as they can find money to do so. That’s their business and it’s what they do. When that money drys up, many will go out of business and some outfits with sufficient funding and a longer horizon will buy the reserves.

  5. MC says:

    This week I read a number of dual power plants in South Korea are switching back to coal from natural gas because of extremely low prices due to reduced demand from China: mind this is fuel-grade coal, not the metallurgical coke everybody has been speaking about.
    More pain is predicted for natural gas producer as the most hated company in Japan, TEPCO, announced the recommissioning of a number of nuclear power plants is proceeding “according to or slightly ahead of schedule”. Australian LNG exporters and Gazprom are sweating profusely.

    And this is to say nothing of the new production that will come into line over the next two years, chiefly from Central Asia, and the very real possibility Iran’s immense natural gas reserves may be on the market sooner than everybody would like.

    Now, when HC producers and refiners need to dump their excess production at a slightly higher price than they would get in the US or Asia, they usually turn to Europe.
    Problem is prices are now every bit as atrocious in Europe as they are elsewhere: Russian natural gas, the benchmark for the European market, is down over 42% year on year, with no end in sight. Spot prices for diesel fuel and heating oil in Rotterdam are both down 41% year on year, as the Dutch harbor is swamped in excess production shipped from the Gulf Coast, Morocco and elsewhere.

    At this rate, producers will have to start rolling over and dying. There is no way they can continue servicing their crushing debt loads, especially now that investors have suddenly rediscovered risk and demand to be compensated for taking it.
    But as a Saudi oil official noted “US producers have so far proven remarkably resilient”. There’s no rout and defaults and bankruptcies are inching forward, not soaring. Something very very strange is afoot here…

    • OutLookingIn says:

      “fuel-grade coal”
      This is a hard coal called anthracite, that is much cleaner burning than the much more common soft coal, which contains a higher concentration of sulphur.
      “metallurgical coke”
      This type of coal is prized for it’s low concentration of impurities, considered the best for “cooking” and turning into coke for making steel, because of its very high concentration of carbon.

      Both types of coal are now expensive to mine, since all the low hanging fruit has been harvested. Leaving only the “soft” dirty burning, high sulphur content coal.

      • john tucker says:

        Virtually all of the recoverable anthracite was mined to extinction a hundred years ago … but the USA is still the “Saudi Arabia” of coal … there’s still a hundred year’s worth of recoverable high-btu bituminous coal in the Appalachians alone … the sulfur problem was solved many, many years ago by the simple construction of “scrubbers”, forcing the smo0ke through these boxes containing a slurry of water and crushed limestone …. the limestone captures virtually all of the sulfur … then the resulting product, gypsum, is made into wall board, sheet rock, and sold back to the consumer ….this has been going on for a very long time now ….

        • Nick Kelly says:

          True- but it’s not as clean as natural gas, which has no particulates of any size to begin with, and burns with much less CO, which is why millions of houses can have gas ranges with the un- vented flames in the kitchen.
          With the price of nat gas where it is, and a thousand years of supply available, it’s time to say, that’s all folks.
          With appropriate packages for those still mining coal.
          As a by-product we can save a few lives due to everything from mine accidents to inhalation.
          (I don’t know about the US but Canada had quite a big old fashioned coal mine explosion quite a while back with dozens of fatalities. Of course in China etc. they happen every month or so.)
          One desirable benefit of simply phasing out coal quickly,instead of politically, would be an increase in leverage on China, which appears to be poisoning itself but is poisoning everyone.

  6. Mike R. says:

    To clarify my first comment. The Fed is not directly financing all these fracking ventures. Rather, I believe a strategic decision was made to encourage fracking by giving an unwritten backstop on the financing of these projects, should things turn south. Again, it isn’t very hard to see how all of this has benefitted the US energy position, even though we know the economics are sketchy at best and the environmental impact concerning. This decision was probably made in the late days of the Bush administration and carried forward by Obama. If I am correct, and the Saudi oil glut continues, we’ll see some sort of bailout/backstop provided for all the debt holders.

    BTW, the Saudis have been running the price of oil down to pressure the US to resolve Syria to their desire/benefit. The hit on Russia is just icing on the cake.

  7. Paulo says:


    I always enjoy your comments, but in this case I have to disagree. Yes, ‘the system’ is full of malfeasance. Yes, it is gamed. However, by basically abrogating your contracted-for debts by refusing to pay them you are in fact stealing and helping to destroy any hope to repair the system, ever. I am not talking about personal bankruptcy here, rather, the action of running up debt with the idea of never paying those debts back. It is no different that kiting cheques.

    I hate corporations, believe me. But where do you draw the line? If I buy a car from the dealer who lives down the street from me and don’t pay him for it I have just stolen something from his family and employees. If everyone did this, we would live in a world of barter with backup, a kind of Tony Soprano world.

    The far better solution is to avoid debt in the first place and live within your means. Or, be distrustful of the system to the point of frugality by living below your means.

    Today, I will be helping my son set up some scaffolding in order to install some lighting on the one condo/apartment in our local village. He has already rented the scaffolding and bought the materials. (Actually, his business charged the materials to his business account from another supplier who….). He will do the work and expects to be paid upon completion. And he will be paid. This is a poor area. We live here for the beauty, freedom, and quiet. It has been a pleasant surprise to experience that when we do work here for people everyone pays, immediately. Even local businesses pay in a day or two. The local Village pays within a week, and that is having to wait for the office cheque signers to get it in the mail. This allows my son to charge a more reasonable rate for everyone. He is an industrial and commercial electrician by trade and offers a reduced rate for residential customers (homeowners). Imagine our surprise when some homeowner insists on paying the full industrial rate ($80.00/hour). !!! These are folks of modest means but they know if they ‘stiff’ the local contractor they are only hurting themselves. They will see the results by losing their contractors and will have to hire from ‘town’. Town contractors charge for travel, and just because… They are not appreciated.

    So, I totally disagree with ‘stiffing’ your debt load. In the end the cost will be higher than the immediate gain. Plus, we have to stand for something. In my son’s case he went to school with people who are now Bikers. He has remained quite friendly with them despite operating what they call that “effing jap bike”. (I won’t mention the club name, but believe me there is only one club in BC so you can figure it out). In your world he would be calling in on those friends to help him collect his bills. It would cost him at least 1/3 of the invoice…..maybe 1/2. Is that the world you want to live in?

    • Petunia says:

      You are advocating what makes sense in a system with a future. My comment was to someone who really believes that the system is in real collapse. To throw real resources into a collapsing system is just like throwing them in a furnace. In the end behavior is what really defines what you think, not what you say. If he really believed the system is collapsing he would already know not to bother investing in it.

      • Mary says:


        As usual, you voiced my thoughts, but in a smarter way.

        Paulo is caught in the sad double bind that games us all. Within local economies, ethics matter. Responsible behavior by all of its members is what allows a community to grow and prosper.

        But at the level of the one percent, “paying what you owe” renders you a patsy. That high interest loan on your now worthless house? Hey, a mortgage is a contract and you are a shiftless loser if you don’t pay what you owe. But the bank that bundled that risky loan and the hedge fund that bought the result, somehow they never have to pay the price of bad judgment and stupid risk taking. The powers that be will cudgel individual debtors into paying out their life’s blood, and if that doesn’t work, it’s bailout time.

      • Ray says:

        You are right. Ethics that apply to free individuals can not logically apply to the concentration camp inmate.

  8. Julian the Apostate says:

    Alas, Babylon

  9. Allan says:

    So what’s this all mean for Cheniere? Will it survive? Its principal play is export, right?

    • Mike R. says:

      I believe it will survive because I think the government will backstop it. It is probably on the fringe of the US oil and gas renaissance strategy mentioned above; however, if they are going to throw billions to backstop the shale plays, LNG exports probably will be protected too.

      Remember, the moral hazard has been well set with the prior QE’s. Not only treasuries were purchased but 1-2 trillion in real estate problem loans. Don’t get me wrong. I don’t support this moral hazard; however, once it is established it is damn hard to stop. QE4 I look to be 2 trillion or so. Half in strategic bailouts (oil and gas one) and half in treasuries to lower rates to negative.

      When? Based on Wolf’s great reporting and details, and contingent on the Saudi oil glut continuing unabated, I’d say mid-2016. They’ll try and stretch it to after the elections; however, I think things are heading south at a faster rate than that.

    • Wolf Richter says:

      Allan, here’s my crack at an answer to your question.

      Its business model has been to raise money to service debt is had raised previously. It never made a dime in its entire history. It will never be able to deal with its debts except by issuing more debt. It will survive as long as it has access to this money. When investors open their eyes and the new money dries up, there will be a huge restructuring, starting from the bottom up: stockholders and unsecured creditors first.

      Exporting LNG, even if you don’t have any debt, is a tough business model because there is an LNG glut globally, and prices have collapsed too.

      Plus, NG prices in the US CANNOT remain this low for long. The industry is collapsing. At these prices there won’t be any drillers left to produce. in other words, the resulting shortage will drive up prices, and Cheniere’s business model will take a further hit.

  10. Yoshua says:

    I wish that someone would do the math and tell me what the price of oil would be without the tight oil production. Would the price be $150 per barrel ? Would nations like Russia, Iran, Iraq, Brazil and Venezuela be flushed with cash and start making demands on the global arena ? What would the economic situation look like in oil importing nations like the U.S and the EU ?

    • MC says:

      $150/bbl was already called back in 2008. I also remember a couple of commodity gurus calling oil in the $180/bbl ballpark by the end of 2009 and by $250/bbl by 2015.
      There’s a very good reason this kind of gurus disappeared together with Lehman.
      Morale: predicting the price of commodities mid-term is extremely hard and long-term is best left to soothsayers.

      Now, about those commodity-producing countries being flush with cash. Until June 2014 they were.
      Saudi Arabia and to a lesser extent Russia used it to build large cash reserves to at least mitigate the effects of a drop in prices. Chile has long used copper and gold profits during periods of high prices for the same purposes.
      But every other commodity producer spent those fantastic profits as fast as the checks cleared, and often before. And it has been like this since time immemorial: see for example how Brazil failed to learn from its natural rubber boom and bust and is seemingly doomed to always be “the country of the future”.

      Iran is quite a bit of a mystery. Part because of its long-running status as international pariah and part because of trends started under Reza Pahlavi (the last Shah’s father), it has developed a far more diversified economy than your average Gulf oil country.
      But it’s an economy that needs large investments, for no other reason even traditional Persian ingenuity can only do so much with restricted access to capital.
      How the ayatollah will use the profits they hope to obtain from access to world markets is anybody’s guess.

      • Yoshua says:

        Without the shale oil revolution the U.S oil production would be down 4 million barrels per day. Without that oil on line there wouldn’t be a global oil glut and oil prices at $40 per barrel.

        There is a theory that the rising oil prices from $40 p/b in 2004 to $150 p/b in 2008 was the primary cause for the financial crisis. The higher oil prices lead to higher production costs and higher food prices, which lead to inflation and an interest hike, which caused the mountain of private debt to start to collapse at the bottom (sub prime).

      • chris Hauser says:

        there’s the problem. the prediction of higher oil led to more investment which led to too much investment, etc etc.

        who is holding all this debt?

    • Ray says:

      If mathematics could answer these questions we would thrive in a centrally planned world. The reason our systems are failing is that there are too many people who believe that maths trumps honest money and price discovery in a free market.

  11. ERG says:

    The lower price of oil, sustained now for some time, has political consequences among the one-trick-pony countries that produce it. Anyone notice that Putin is now ok with Assad maybe going buh-bye? Think that’s because he’s just a swell guy or because he’s getting his ass kicked with oil at $35/bbl and still falling?

  12. Lee says:

    How about some of that NG and oil price destruction finding its way to Australia?

    Cleaning out the old bills and looked at the electricity and NG bills from 2008-09……….

    Electricity was 11.5 cents a kWh. Today it is around 34 cents. The supply charge was $50 a quarter. Today it is $1.33 a DAY. About three times the cost in only 6 years!!

    Luckily I spent up big when I had the bucks and put up a small solar panel system back in 2009 and a NG boosted solar hot water system as well. Sometimes the thought of wishing I had put up a bigger solar electricity system is balanced by the reality of the loss in value of the system. In any event the system has more than paid for itself by now so anything we get is a bonus.

    Now the only thing we need is a decent summer in order to generate ample electricity to avoid the huge bills.

    (PS it only hit 103F here today, yesterday was 106.5F, and yesterday was a mild 104.5……tomorrow is supposed to be back to ‘normal’ (whatever that is now) 70 F)

    NG has more than doubled since then.

    Gasoline is now A$1.11 a litre or about US$3.00 a gallon. When we moved here in 1995 the price was less than half that.

    • MC says:

      That’s a commonly depressing reoccurrence: deflation for me, but not for thee.
      Earlier this year my utility company sent me a letter to tell me with a straight face the NG supply is going up 5%. As I related previously benchmark NG price in Europe is now down 42% year on year.
      And this is to say nothing of fuel, which went back where it was in the Summer of 2008 (oil at $120/bbl) when oil went under $60/bbl.
      If we are in a “deflationary spiral” one can only imagine how things would be if we were in an inflationary one.

      • Lee says:

        Well we just had our regular jump in gasoline prices here from A$1.11 to A$1.34 a litre.

        Just before the start of the Christmas holidays.


        Yeah, right.

        Now it will take three weeks to get back down to that price.

        Funny how Brent just hit a 10 year low and Tapis is now under US$40.

    • chris Hauser says:

      yes, utility costs do seem to have rocketed.


      lobbying + monopolization + “regulation” = you pay for it.

      or else you go dry, get cold, get hot, or go dark.

  13. john tucker says:

    Here is the gas price to be watching …. currently 83 cents ….

  14. Brain of England says:

    I last cast an envious eye on US natural gas prices when at $3 (per million Btu). It was when I reading an article about European companies finding excuses (to local Governments – eg moaning that Gov not spending enough on regional roads/infrastructure)… to get around the real reason they were moving factories to the USA….. cheaper energy. At the time at $3, that was about x3 cheaper than in Germany for natural gas. Now so much cheaper still.

  15. tonya says:

    If mathematics could answer these questions we would thrive in a centrally planned world. The reason our systems are failing is that there are too many people who believe that maths trumps honest money and price discovery in a free market.

  16. John Doyle says:

    oil debts can be written off, debt jubilee style, so they can continue to seek loans at whatever the cost of the money, which today is Zero.
    So it’s not as connected as one would think. The main issue is the resources limits.

Comments are closed.