A Sober Look At U.S. Natural Gas

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 |  Includes: FCG
by: Walter Kurtz

Looking back at a two year old post on natural gas called "Natural gas prices below zero?", it feels as though we are back to the same price dynamics. Price for the "nearby" Henry Hub contract hit new lows today at $3.317/mmBtu.


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What is driving this price collapse? As before it is the usual suspects: limited storage, strong production (particularly in U.S. shale), increasing reserves, and warm weather. Let's take a quick look at the first three.

1. Storage: The chart below compares current storage usage versus the historical range based on where we in the seasonal cycle (inventory drops off in the winter and increases the rest of the year). Just as in 2010 and 2009 we are at the top of the range and may go even higher if the weather in the NE & Midwest stays warm.


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Source: EIA

2. Production continues at rates significantly above historical levels.


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Source: EIA

This growth is driven by a rapid increase in shale gas production. According to EIA, the U.S. shale production increased 14-fold since 2000 and is now 22% of total U.S. production.


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Source: EIA

3. And estimated reserves in the U.S. continue to increase.


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Source: EIA

It is almost as though the U.S. is becoming the Saudi Arabia of natural gas but with limited export capabilities. No real support for natural gas prices is expected to come until 2013. According to a Goldman report this support will come from moderation in production growth and environmental restrictions that will force conversion from coal burning to natural gas.

Goldman: 2013 shaping up as a transition year to a more balanced market We expect 2013 to be a transition year, with the market’s reliance on price-induced responses (e.g. need for coal-to-gas substitution) diminishing as U.S. shale gas production growth moderates, economic growth improves and looming increased environmental restrictions – notably, CSAPR Phase 2 and Maximum Achievable Control Technology (MACT) – further boost gas-fired generation at the expense of coal. On net, we expect less price-induced coal-to-gas switching will be needed than in 2012, allowing prices to move higher, and are introducing a 2013 NYMEX natural gas price forecast of $4.25/mmBtu.

Until then if the weather stays warm, there is no telling how low natural prices could drop.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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