The Reason Why Natural Gas Is So Cheap

by: Paulo Santos

In the last few years, most commodities had good runs, but there’s one commodity in particular that has had an incredible bear market.

That commodity is natural gas. Natural gas is trading, today, 80% below the price peak it reached as far back as December 2005. So what happened here?

In a single word, what happened was technology. Technology for natural gas exploration evolved and permitted the gas trapped in shale rock to be extracted. So, with shale gas resulting in much higher production, there was some point at which prices were going to be hit substantially, because natural gas consumption isn’t growing much.

This can be seen in the following chart, depicting natural gas consumption in the U.S. over 40 years. As we can see, natural gas consumption went up a meager 13.9% over 40 years, or just 0.33% compounded per year (source: EIA).

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Now, what happened to production? Due to advances in exploring shale gas, average daily production went up 19.57% in just under 6 years! That’s a 3.1% compounded annual growth, 10 times faster than consumption has been growing in the last 40 years!

This obviously made for a growing oversupply of natural gas, like pictured below.

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And a continuing oversupply of natural gas had the effect of filling up the storage capacity, to such an extent that there are times when there’s no further capacity available and production has to be shut in.

(Click to enlarge)

What’s also incredible is that back in 2005, many people couldn’t see this, and there were even expensive import facilities being set up so as to supply the then-expensive market with supposedly cheaper imported liquefied natural gas. Such was the enterprise Cheniere Energy (NYSEMKT:LNG) set up to do. Today, it languishes under a ton of debt, while Natural gas goes nowhere and is actually cheaper in the US than elsewhere. Those facilities, meanwhile, are being converted into export terminals.


Given that demand for natural gas in the U.S. is rather inelastic (at least until there’s some kind of initiative to have more using it), focus has to continue on the production and storage figures. There remains no clue as to when balance will be back in this market, so there’s good reason to avoid natural gas and its producers.

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