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Natural gas tops $5 for first time since 2010, demand should remain high

  • As the U.S. freezes and stocks plunge, benchmark U.S. natural gas futures topped $5/mmBtu for the first time since Aug. 2010 on expectations that continued cold weather would keep demand high for the heating fuel.
  • Natl gas has moved well into overbought territory during the last few days as consumers have pumped up their thermostats, and the spike may last a while longer given that the cold snap is set to continue all of next week.
  • Despite the run-up in prices for Jan. and Feb., longer-dated prices for the spring and summer remain below $4.50/mmBtu, providing little incentive for the likes of Chesapeake (CHK -0.1%), Devon (DVN -0.8%) and EOG (EOG -2%) to switch from oil to gas drilling.
  • The shift to backwardation is a big boost to United States Natural Gas Fund (UNG +8.2%) and even bigger to the leveraged VelocityShares 3X Long Natural Gas ETN (UGAZ +24.4%).
Comments (39)
  • After a brief vacation, King Coal is back.
    24 Jan, 02:49 PM Reply Like
  • @deercreekvols--


    You might want to go with King Cotton instead.
    24 Jan, 03:42 PM Reply Like
  • TimeOnTarget,


    King Cotton in layers...frigid in western NY.
    24 Jan, 04:23 PM Reply Like
  • king coal isn't coming back without major innovation that extracts the energy cleanly. ain't gonna happen. we will even see china forced to control coal use because it's nasty stuff.


    i've seen research about a catalytic process to extract energy from coal. very interesting but like most things that you hear about that could revolutionize an industry, nothing ever happens.


    i don't see the problem with allowing natural gas prices to stabilize in the 5.50 range. sure, people will complain like it's a crime that an industry could sell something for the full cost of production plus a fair profit. but if we had stable energy prices that insured essentially growing supplies, we could be on the cusp of a real economic synergy. vast supplies of a product that can be used to generate energy or manufacture fertilizer, chemicals and plastics? how can that be anything except wonderful for the country? having natural gas (both production and use) ramped up nationwide should be the foremost domestic economic policy of federal, state and local governments.
    24 Jan, 04:30 PM Reply Like
  • @Pmon, It has happened and is happening and can happen a lot, just because you don't know about it, doesn't make it not so. However there is a glut of oil and gas and OB1's hatred of anything coal that keeps it under the radar.
    24 Jan, 09:48 PM Reply Like
  • Add in the growing campaign from the left to ban fracking nationwide and we have a recipe for $8 natural gas by Christmas.
    24 Jan, 10:07 PM Reply Like
  • 2040 according to the EIA
    25 Jan, 05:28 PM Reply Like
  • "Coal investors should look for the companies with the higher quality coals that will meet EPA standards with low sulfur and ash content as they receive premium pricing. I may have been early highlighting this sector a few months ago, but now some major banks are turning bullish on the space as they forecast a shortfall as demand picks up in the fourth quarter of last year."

    25 Jan, 11:13 PM Reply Like
  • @deercreekvols --


    Trust me on this. Don't wear cotton in cold weather -- PERIOD.


    Cotton readily absorbs and retains water. Great for the desert. Not good for freezing weather. Wet cotton clothes are far, far, far worse to have on than nothing-- like it robs your body of heat at a 20X rate. Even damp cotton clothes are no bargain at all. Don't wear cotton in cold weather. Not at all. Nothing. None of it. Ever.


    Wear wool, cashmere, hemp, silk, polypropylene, fleece, etc. ABC -- anything but cotton in cold weather. I bring you that advice through the school of hard knocks. Plus, National Park rangers at one park call it "death cloth."


    Don't wear cotton in cold weather. Repeat: do NOT wear cotton in cold weather. Never. Not at all.
    26 Jan, 02:25 AM Reply Like
  • King Coal is back ??? Are you kidding ? This administration is determined to kill coal. Even China cannot tolerate the pollution that coal creates. Want to lose money ??? Invest in coal.
    26 Jan, 03:49 AM Reply Like
  • The combination of well freeze ups which have constrained production and a consumption spike because of very cold weather have provided spot prices with a temporary boost. However, what the weather gives, it also takes away...
    It will take notable increases in organic demand to sustain prices in the $4.50 to $5.00 range, recalling that at these prices shut in dry gas production will come on stream and new drilling in dry gas basins will be profitable.
    24 Jan, 03:03 PM Reply Like
  • What well shut ins?!!!! Last time there were sizable nat gas well shut-ins was winter(or lack thereof)-summer 2012....ended years ago. The drilled/un fracced inventory in the Marcellus has largely been chopped down.....that's about it. Go listen to the conf. calls of the top 10 natty producers over the past several Q's.....Would need SUSTAINED natty price over $5 in most cases to even consider reallocating capex to dry gas. "Sustained"...means 6-9 least. COG/EQT/RRC/SWN will see nice % gas production increases this year but no where near the rate of change seen since 2010 in the Marcellus. 2014 capex for E+P's have almost all(waiting on u CHK) been set....this ain't 2007/2008 were co's couple simply let the stock issuance rip and or debt/converts fly to raise quick $$ to fund overspending. These days, boards and/or activists are demanding co's live with their cash flows.


    Gas overbought??? bet, but if Feb develops as the winter from hell....cold march/april and we get storage below 1 TCF....then a super spike to $7-$8 becomes very likely by April.


    Majority of sell/side shoppes(along with the PE fragilistas on SA) still have 2014 natty avg. assumptions below $4. I think it's time they give the model worship a break and use some common sense.
    24 Jan, 07:07 PM Reply Like
  • BHI weekly nat gas count...dropped 9...clearly, clearly $4.40 wasn't the magic number. Sitting near a 19 year low in gas rig count. Marcellus dropped 5 rigs...interesting.
    24 Jan, 07:10 PM Reply Like
  • Scratch that, looks like the Marcellus only dropped 2 for the week. dropped 6 y/y
    24 Jan, 07:28 PM Reply Like
  • It is funny to think just 2 months ago the gas industry was lobbying (and still is) lobbying to export natural gas and oil because they say there is a glut of it and they can't sell it for a decent price in the US while the same company argues in Congress that they should continue to get oil subsidies because we still aren't energy independent and must import oil from the Middle East. In the meantime they block LNG/CNG vehicles and mass transit to support the gasoline industry.


    No wonder the US has energy problems. The government is following policy from these bozo's lobbyists. They obviously aim to bankrupt the US and its citizens merely for the sake of enriching themselves.
    26 Jan, 12:10 AM Reply Like
  • This is becoming the dream scenario for natty focused E+P's that I blogged on SA about last summer/fall. The fragilista, elitists mocked the Farmers Almanac frigid winter predictions(largely based on the Aug 2012 peak in the solar cycle), bow down to Bentek w/their $4.20 2017 prediction or IHS's ..."natty between $4-$5 for the next 20 years" lunacy. Sheer arrogance/stupidity to even attempt to put out a 20 year forecast...for ANYTHING!


    The backwardation in the natty futures is quite bullish. Only the marcellus would make much sense to ramp up at the 12 month strip price of about $4.50 BUT they are capacity constrained.


    Natty is the most volatile commodity, by far..shorts were lulled into a false sense of security by the warm winters since 2008, being reassured by the analysts that prices were capped at $4 for eternity....they neglected to learn from history.
    26 Jan, 08:57 AM Reply Like
  • question! what will happen if Obama kills king coal like he wants and the US starts using more nat gas in cars and things? sounds like higher nat gas prices or we must use more coal... or I could be wrong
    24 Jan, 04:05 PM Reply Like
  • That's true but a move to something like natural gas vehicles would not have any meaningful affect on prices for multiple years. This run up is 100% weather. If things had gone the opposite way and winter was warmer than average, prices would now be $3. I do think natural gas prices will go up due to non-temporary demand but a lot of the things that will cause that are not currently factors. Other than for heating, demand really hasn't gone up much yet over the last few years.
    24 Jan, 04:11 PM Reply Like
  • Good point user353732 about dry natural gas production. But where are the well freeze ups? Can't find those... Think that most analysts are overestimating nat gas production and underestimating nat gas demand. I'm predicting future Nat gas futures will move towards $5 per btu or $5.50, just like Boone Pickens said it would on cnbc last summer if we have a cold winter in 2014....


    Btw king coal will never leave, but it wont be king again for a while. Switching from gas to coal takes time, and so does production. Plus with obama, and the closure of coal power plants...
    24 Jan, 04:06 PM Reply Like
  • A lot of the coal production is just shifting out west from Appalachia - the death of the industry has been greatly exaggerated, as production is down maybe 13% since 2007 levels, and most of that is from low natural gas prices and the drop in electricity demand from the recession.



    As for NG, until the futures curve starts to respond, I'm leaning towards this being a short term reaction to record demand due to record cold temperatures, and not the start of a permanent price spike. Still think prices are stuck in a range from $5.50 on the high end to $3.50 on the low end until export capacity ramps up. Its a traders market.
    24 Jan, 04:18 PM Reply Like
  • That mirrors my view. I mean, we already have more supply than demand when weather is average as of the last time that actually happened a few months back. Extra supply would be great for getting us out of this hole but once we get out of this hole we will have dramatic oversupply if drilling picks up meaningfully above current levels.


    In other words, you don't price a commodity long term based on worst case scenario, you price it based on the most probable and adjust when something worse happens. Imagine if we had $5+ prices in the fall just in case winter happened to be colder than average, but instead winter turned out to be warmer than average. We would have so much oversupply right now the market would probably be setting new all time lows.
    24 Jan, 09:28 PM Reply Like
  • Futures are presuming that temperatures will revert to normal around the country. Does not mean that it will definitely be the case.
    24 Jan, 06:51 PM Reply Like
  • Watching CNBC and FOX news this week showed the air pollution in China, primarily from coal fire plants. Its worse than Los Angeles California ever had. Chocking!! This administration is anti-coal. The cost for the utility Co's. to switch from burning coal to nat. gas is not cost prohibitive if you take in the cost required to clean up coal fired plants. The cost for the 'scrubbers' and maintenance makes nat gas look pretty reasonable. All the reports indicate that the US has over a 100 years of nat. gas reserves. The switch is on for nat gas. When the Chinese figure out the how to's, and they will, they will be switching to nat gas as well. It's like Boone Pickens says about nat gas---its cleaner, its cheaper, and its ours. More the reason the US needs to switch to its use in as many places as possable
    24 Jan, 06:55 PM Reply Like
  • why use all our nat gas now while its cheap? kinda charlie mungers reason for not using our own oil up now
    24 Jan, 07:10 PM Reply Like
  • Nat gas is double to triple the cost in most other countries.
    24 Jan, 09:02 PM Reply Like
  • sounds like we could make more selling it overseas LNG...
    24 Jan, 09:16 PM Reply Like
  • Lets build an export terminal!!
    24 Jan, 09:18 PM Reply Like
  • China to cut coal usage to clean up air and prevent social unrest:



    Tennessee River poisoned for a generation due to huge TVA fly-ash spill at Kingston, TN



    Quite likely one of the worst environmental disasters in US history, and barely reported. I bet cancer rates sky in the TN river valley for the next 50-100 years.


    EIA map showing new power plants:



    Dominated by natural gas, solar, and wind. I see one new coal plant, the "clean coal" (an oxymoron if ever there was one) plant in Mississippi that has been plagued by cost over-runs and is years behind schedule. What a disaster.


    Coal is toast. Natural gas is abundant, cleaner, and much cheaper. If the real environmental & healthcare costs of burning coal had been put on the producers & consumers (instead of on the backs of the American people), the true cost of coal would be multiples of natural gas, like 4-5x at current prices.
    24 Jan, 07:15 PM Reply Like
  • I'll reiterate what Ive said on numerous ng was one of best opportunities since the banks after 2008. Buy the low cost producers and hold.
    24 Jan, 08:49 PM Reply Like
  • The analysts slobbering lovefest w/the Marcellus as the salvation for all our nat gas needs going forward is utter rubbish. They take 4 years of Marcellus data, extrapolate it for the next 20 and come up with silly conclusions(like the Marcellus will one day produce 1/2 our nat gas 40 bcf/d). Majority of sell side analysts, petro. engineers get into the bad habit of model worship and throw common sense to the wind.


    The E+P companies realize the mistakes that were made during the shale land rush from 2004-2012(as do the sovereign energy co's who's JV's/drilling carries fueled much of the boom). Even if natty clears $6 this winter, there will be no flood of rigs to drill gas....will have to be a sustained move.
    25 Jan, 10:49 AM Reply Like
  • State of Alabama is dealing with a propane shortage, 8 degrees at night stuff like that, freezing rain on the gulf coast yesterday. Must be that global warming thing.
    25 Jan, 03:20 PM Reply Like
  • Plenty of behind pipe supply waiting on infrastructure in Marcellus. Associated & dry
    NG meeting demand for now. Permian, Eagleford, Bakken, Miss Lime, Cana Woodford all still drilling full speed ahead.
    25 Jan, 10:55 PM Reply Like
  • I would like to say that the US is not freezing. The East Coast is freezing but the East Coast is not the US. The West Coast is basking in warm temperatures and a drought. In SE Arizona, I can't remember the last time I had my heater on. My only point here is that the East Coast is only one segment and hardly the entire US.
    25 Jan, 11:25 PM Reply Like
  • Most of the population is in the frozen part. And West coast is always mild anyway so it doesn't really impact gas usage much.
    25 Jan, 11:30 PM Reply Like
  • How many people live in Chicago, Boston and New York vs. New Mexico, Arizona and Nevada?
    26 Jan, 11:25 AM Reply Like
  • DeepValueLover


    "How many people live in Chicago, Boston and New York vs. New Mexico, Arizona and Nevada?"


    You mean you don't know? Figures...


    I'm pointing out the mindset that thinks the East Coast IS the US and it stops at the Mississippi. It's a rather closed minded view. Another shocker... You're not the center of the Universe either...


    Why not just say the East Coast and Mid West are in a deep freeze instead of saying the entire country is, which clearly isn't true. Quite the opposite in fact.
    26 Jan, 12:48 PM Reply Like
  • Agreed but there is a bit of truth to it as people in the northeast are probably more likely to turn on their heater (or even own a heater in the first place) when it gets cold. It isn't a matter of population. A huge percentage of the US population lives in the western and southern US - Texas, California, Florida, etc etc etc... California's population is nearly twice that of New York State. Massachusetts has 1/3 the population of Florida.
    26 Jan, 06:11 PM Reply Like
  • ephud:


    When did I say the whole country was in a deep freeze?


    I was simply pointing out that since most Americans live in the East and Mid-West that is usually the focus of national attention.
    26 Jan, 06:42 PM Reply Like
  • DeepValueLover


    "When did I say the whole country was in a deep freeze?"


    You didn't, the Author did, or whoever put together those bullets.
    26 Jan, 08:23 PM Reply Like
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