The northern hemisphere is experiencing arguably the hottest summer on record. It’s a time when air conditioning shifts from a nice-to-have to a necessity, and natural gas prices normally spike. Yet, the world is awash in natural gas, prompting drillers to pump the brakes and restrict supply. 

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Much of the oversupply dates back to December. The winter was unusually warm, leaving a surplus of unburned gas. Once March hit, the market was flooded with cheap gas, leaving consumers elated and producers seeking another round of production cutbacks. Prices increased somewhat but then plummeted again with supplier output. 

Large producers like Coterra Energy and EQT are riding this wave. It’s a delicate supply game that, in many ways, lies at the heart of a market-based economy. Once prices drop to a point that makes drilling and supplying natural gas no longer profitable, producers pause supply to compete.

The broader oil and gas industry has shifted in recent years, focusing on profitability over growth. CEO compensation plans previously encouraged production above all else, but the market is a fluid creature. Production of a good that the world needs requires more of a trader’s mindset if the ultimate objective is to keep costs in check and return cash to shareholders. 

Natural gas production in August is down by over two billion cubic feet daily. In February, roughly 120 natural gas drilling rigs were in operation, compared to 98 presently. Part of the problem for producers is the lag time between when production stops and the effects of reduced output on the market. It takes in the neighborhood of six to nine months of less drilling to impact prices.

Once October hits, demand will increase again. But, analysts suggest there is enough gas in storage to get the US consumer through winter at an attractive price point. Compared to the five-year average, the volume of natural gas in storage is 13% higher. Natural gas futures are also at their lowest since 2019, down 14% from a year ago closing at $2.198 per million British thermal units in mid-August.