Natural gas prices can still go lower says Man, this is not the oil market
Posted on 24 February 2012 with 5 comments from readers
Oil prices are heating up with the sanctions against Iran over its nuclear program. But the price of natural gas is still going through the floor warns Man Group in this article, so stay away from gas ETFs:
Looking at US natural gas one can see that prices have come down considerably over the past three to four years and you might expect them to finally have reached a floor; however, unusually warm temperatures and abundant supply will put further pressure on prices.
The firm production growth since 2008 is likely to continue into 2012 and potentially drive up inventory levels. In the short to mid-term, we believe prices for natural gas could fall below $2 per million BTUs.
Shale gas
The strong growth was largely driven by increases in shale gas production over the past year. Demand for the same period only rose moderately though. In the near future production should still expand despite a slowdown in new drilling activities and keep the market oversupplied.
At the same time the US has experienced one of the warmest winters in the past 60 years, which allowed natural gas inventories to swell to record levels.
Over the long term there are a number of factors that support the case that the importance and relevance of natural gas should increase. President Obama in his State of the Union speech has just recently taken a strong stand for a increased focus on natural gas in the US.
‘We have a supply of natural gas that can last America nearly 100 years, and my administration will take every possible action to safely develop this energy’, he said. One big advantage of natural gas is the fact that the distribution infrastructure is already there.
Infrastructure ready
Gas stations merely need to add a natural gas pump and off they go. We believe this gives natural gas an important comparative advantage when evaluating other alternatives such as electricity powered cars, where the whole infrastructure would have to be built up from scratch.
Storage providers place so-called ‘ratchets’ in place to protect their fields. Ratchets are contractual obligations that require storage users to draw down their gas to a certain percentage volume by the end of withdrawal season in March.
It is very likely that these ratchets could force a significant amount of gas from the inventory, as otherwise penalty fees may apply to the users. The flushing out of excess gas into certain local markets should result in lower cash prices in those regions.
The US domestic marketed production for 2011 outran demand by far. At the beginning of February some producers announced to reduce gas rig counts in the US. For prices to start rising again though, further production cuts would be needed. Another five or six producers would need to cut rigs on a similar scale; however history shows that the likelihood of this happening is not very high.
5 Comments posted by readers:
The United States is an extremely lucky nation to be blessed with so many resources, and this is certainly a golden opportunity for America to start weaving itself off of foreign oil. There was a bullish article on Bloomberg the other day talking about energy independence by twenty twenty. A bit optimistic? Maybe. Nonetheless, natural gas will hopefully bridge our energy needs from now until we identify an alternative energy source and leave the petroleum age in the dustbin of history!
@ Jim, a Bigger Optimist than I:
Throughout my life, I’ve always been the “eternal optimist” . . . but when it comes to government intervention of so-called “free market” enterprises, I cease to be an optimist. I agree with you that the US is a lucky nation to have such an abundance of natural resources.
But Government Screws it Up:
Take, for example, the US Dept. of Energy. I distinctly recall the former President Carter’s appeal in 1977 to create a new Dept. of Energy, that would “sharply reduce America’s dependence on foreign oil.”
I knew several people (with outstanding credentials!) who went to work for the DoE back then.
And what does the US have to show for the DOE’s efforts over the past 33 years? Nothing!
Worse, the DOE has imposed hundreds (maybe thousands!) of new rules & regulations that have strangled the US energy industry (oil, gas, coal, uranium, etc.) and reduced their productivity. That’s their only contribution.
Here’s a few stats to measure the “success factor” of the DOE:
# of DOE government workers: over 16,000 (… but what do they do?)
# of DOE Contractor workers: over 100,000 (… they write reports to DOE)
2012 Annual Budget: $ 26.5 billion
2013 Annual Budget: $ 29.5 billion (proposed)
Percent of Oil Imported in 1977: approx. 30%
Percent of Oil Imported in 2011: approx. 72%
Nice stats Bill!
A budget of $26.5 billion to make things worse!
Apologies I meant to congratulate Obewon on the magnificence of his statistics.
The Force is strong with this one.
@ Willing Banker:
Tnks for the kind words, but since the government doesn’t want the general public to know what’s really going on, I’m just trying to expose “the truth”.
Excessive Waste & Very Low Productivity:
You see, I have a very distinct advantage here, because I worked for about 5 years as a senior executive in the federal government (so I know how the “system” works). The grim stats I mentioned (above) are merely a sliver of the excessive waste and total lack of productivity within the departments of the federal government.
How are Senior Executives “Graded”?
Have you ever wondered how the “grading system” works for the most senior executives within the federal government? It’s certainly not based on any metrics that should be used. In reality, a senior executive is considered “very successful” if his/her annual budget is increasing (whether or not such an increase is justified). If a senior executive does not spend all of the funds that were allocated to them, then their budget for the next year is automatically reduced (and that is considered as a “failure”). Bottom Line: So it behooves a top manager to waste as much money as he/she can each year, rather than to cancel programs that are known to be worthless.
A Thought Experiment: imagine for a moment how much taxpayer money (and freshly printed FED money!) is totally wasted each year! It’s certainly multiples of trillions! . . . (the endgame draws nigh!).