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Oversupply

Recent reductions in natural gas (NG) price may be related to continued strength in production capacity, specifically in unconventional shale gas fields. The Potential Gas Committee estimated U.S. reserves are 35% higher than just two years ago, thanks to new technology that has allowed producers to drill for gas in shale rock. The committee estimated the country's total natural gas resources at 2,074 trillion cubic feet, an increase of 542 trillion cubic from its last report.

According to Ziff Energy, in 2008 shale gas production was over 5 bcf per day (8% of North American gas production), with 70% attributable to Barnett shale gas in Texas. Increasing unconventional gas production will comprise 53% of gas supply by 2020.

Sharp Contango Further Dampen Spot Prices

A significant differential between current spot prices and prices for NYMEX futures contracts for next winter delivery provides a strong economic incentive for the high level of storage activity. Traders on the futures market are able to lock in this difference of over $2 per MMBtu and cover their risk exposure by storing supplies until next winter, according to the weekly natural gas report by EIA.

In the short term, NG's price is still facing downward pressures from an excessive buildup in inventories. Prices could drop further if inventories keep rising until NG inventory nears storage capacity limits.

Will It Turn Around This Winter?

I compiled the average monthly NG price from the last 15 years' data. Not surprisingly, the highest price was in December, which was 20% higher than the lowest month (August).

However, supplies continued to be viewed as more than adequate to address near-term demand, including heating-related demand increases this winter.

How Low Could NG Go?

Energy Bulletin believes that shale gas is economic at the $5-6/mcf range. A Ziff Energy study found that overall full cycle costs for shale gas varied from $4.50 per mcf to 9.75 per mcf.

However, the variable cost is very low. For example, Southwestern Energy Co.'s (NYSE:SWN) operating costs come in around $2.

In the short term, the price of natural gas could go as low as its variable cost. In the long run, it could only be sustainable at around $5-6 level.

Top 10 NG ETFs (by net assets)

#
Fund Name
Ticker
1
United States Natural Gas
2
Ultra Oil & Gas ProShares
3
UltraShort Oil & Gas ProShares
4
SPDR S&P Oil & Gas Exploration & Prod
5
IShares Dow Jones US Oil & Gas Ex Index
6
SPDR S&P Oil & Gas Equipment & Services
7
PowerShares Dynamic Oil & Gas Services
8
iPath DJ AIG Natural Gas TR Sub-Idx ETN
9
First Trust ISE-Revere Natural Gas
10
Short Oil & Gas ProShares

Source: Yahoo Finance

Top NG Producers

If you like individual companies, instead of ETFs, the following are top NG producers:

#
Company Name
Ticker
1
BP plc
2
Chevron Corporation
3
CONOCOPHILLIPS
4
Exxon Mobil
5
Devon Energy Corporation
6
Chesapeake Energy Corporation
7
Anadarko Petroleum Corp.
8
EnCana Corp.

Source: Wikinvest

Disclosure: I have a long position on UNG.

Source: How Low Can Natural Gas Prices Go?