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Natural gas prices likely will remain range-bound at $3-$4/MMbtu until there's a structural...
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Thursday, October 18, 2012, 12:32 PM ETNatural gas prices likely will remain range-bound at $3-$4/MMbtu until there's a structural change on the demand side, Oppenheimer's Daniel Katzenberg says. But that doesn't mean the sector will be boring, as he anticipates M&A activity will pick up, expecting attention in Bakken and Permian names such as WLL, KOG, AREX and PXD.
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The extreme price volatility in NG is because the inventory buffer, the natural gas storage, is a relative small number compare with annual supply and demand. The storage can hold 4000 BCF. The bulk of that storage capacity, 2500 BCF, is used to absorb the seasonal variation of demand, leaving only 1500 BCF.
Then after you taking away some wiggle room, there is only 700 or 800 BCF of spare storage space that can be used to absord supply/demand imbalance. Now compare that number with 25000 BCF of annual supply/demand volume, we are talking about a buffer of only 3% annual supply.demand volume. If supply and demand is out of wack for just 3% in a year, it pushes the price to either of the extremes.
The development of shale gas makes maintaining a delicated balance of supply and demand that much harder. Without drilling new wells, existing US natural gas production will drop by 33% in a year. To counter that decline, the NG industry must drill just enough wells to compensate for the 33% decline, not more, and not less.
3% divided by 33%, is only 9%. That means well drilling MUST be maintained at a certain threshold level to maintain flat production. New well completion rate must be well within +- 9% of that threshold. With rig count 60% less than where it was, how do you expect the well completion rate be within 9% of replacement level?
Natural gas price will shot to the other extreme which is way up.