WTI Crude

Loading...

Brent Crude

Loading...

Natural Gas

Loading...

Gasoline

Loading...

Heating Oil

Loading...

Rotate device for more commodity prices

Alt Text

Georgia Is Giving Up On Gazprom

It’s dated Gazprom and flirted with Iran,…

Alt Text

Novatek Aims To Dethrone Gazprom With Qatar Deal

Given the chance to produce…

Why Cheap Natural Gas Is History

Natural gas rig marcellus

Natural gas prices averaged a little more than $2.50 per mmBtu (million British Thermal Units) in 2016. Those days are over. Prices will average at least $3.50 to $4.00 in 2017.

Prices have more than doubled since March 2016 but gas is still under-valued. Supply is tight because demand and exports have grown and shale gas production has declined.

In April of last year, I wrote that natural gas prices should double and they did. Henry Hub spot prices increased 2 1/2 times from $1.49 to $3.70 per mmBtu and NYMEX futures prices doubled from $1.64 to $3.30 per (Figure 1).

(Click to enlarge)

Figure 1. Natural Gas Prices Have More Than Doubled Since March 2016: The Days of $2.50 Gas Are Gone. Source: EIA and Labyrinth Consulting Services, Inc.

Nevertheless, gas prices are still too low. Storage was at record high levels throughout 2016 reaching 4.1 Bcf (billion cubic feet) and 84% of working capacity in mid-December. Storage has fallen 1.1 Bcf in the last month to 61% of capacity. That is below the 5-year average (pink, dashed line in Figure 2).

(Click to enlarge)

Figure 2. Gas Storage Levels Have Fallen 1.1 Bcf To Below the 5-Year Average. Source: EIA and Labyrinth Consulting Services, Inc.

Comparative inventory (C.I.) trends are the best indicators of gas price. These compare current storage to a moving average of levels for the same date over that last 5 years and correlate negatively with spot prices (Figure 3). C.I. fell 120% from May to December 2016 and gas prices doubled.

(Click to enlarge)

Figure 3. Comparative Inventories Have Fallen Sharply Since May. Source: EIA and Labyrinth Consulting Services, Inc.

There are occasional short-lived excursions from the correlation. These typically occur when the market believes there is sufficient supply for the winter heating season in September or October. The market over-shoots with lower prices that are later corrected upward.

The November 2016 price drop shown in Figure 3 is an example of this phenomenon that occurred outside of the normal September-October pattern. A similar price drop began in January 2017. Related: Why Russia Beat Saudi Arabia As China’s No.1 Oil Supplier

Figure 4 shows the November and January price drops as departures from comparative inventory vs. spot price trend lines.* The current trend line (May 2016 – January 2017 in red) closely resembles trends for periods when gas prices were $4.00 per mmBtu or higher (August 2011 – March 2013 in orange and March 2013 – March 2014 in purple).

(Click to enlarge)

Figure 4. Natural Gas Is Undervalued By $0.50 – $1.00/mmBtu. Yield curves show relevant trend lines for current natural gas prices. Source: EIA and Labyrinth Consulting Services, Inc.

Recent price drops partly reflect market expectation of increased gas production in the Marcellus Shale play because of new 2017 pipeline capacity. They also suggest that the market anticipates greater tight oil and associated gas production following OPEC production cuts.

Figure 4 suggests that current gas prices are under-valued and should be at least $3.75 and probably closer to $4.00 instead of $3.27/mmBtu, last week’s average spot price.

Supply and demand fundamentals also support higher prices. Gas production has been declining since February 2016. At the same time, net imports are decreasing as pipeline and LNG exports increase. Related: What A Trump Presidency Means For Canadian Oil

Shale gas production is declining and conventional gas has been in terminal decline for the past 15 years. As a result, the supply surplus that has existed since December 2014 has disappeared and a supply deficit began in January (Figure 5).

(Click to enlarge)

Figure 5. Natural Gas Supply Deficit in January 2017. Source: EIA January 2017 STEO and Labyrinth Consulting Services, Inc.

During the last supply deficit from December 2012 to November 2014, Henry Hub spot prices averaged $4.05 per mmBtu. NYMEX futures prices reached $3.93 in late December 2016 before closing at $3.20 last week. Both spot and futures prices should return to $3.75 or higher once the market recognizes the reality of tighter gas supply.

Shale gas production has declined almost 1 Bcf per day since August 2016 and all shale gas plays are in decline (Figure 6).

(Click to enlarge)

Figure 6. Shale gas production has declined 1 Bcfd since August 2016. Source: EIA and Labyrinth Consulting Services, Inc.

Only the Marcellus and core Utica break even at $4 gas prices. The Marcellus has stopped growing and more pipeline capacity to better-priced markets won't happen as quickly as some analysts believe. Although the Utica play has growth potential, it will be spread over several years and will be largely cancelled by increased exports.

Shale gas magical thinking remains strong but the paradigm of infinite, cheap supply is no longer working. There is now too much demand between power consumption and exports to keep up with declining production.

Once decline begins, it is almost impossible to turn around short of a massive drilling campaign. The requisite capital and public support are simply not there.

That means that prices will increase. Enough additional drilling will become marginally profitable to keep natural gas affordable but it is unlikely the U.S. will return to a supply surplus any time soon. The exuberant days of cheap, abundant natural gas are over.

*Developed by my colleague J. M. Bodell who has taught me everything that I know about comparative inventories

By Art Berman for Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage


Leave a comment
  • Ronald C Wagner on January 23 2017 said:
    What is cheap? Natural gas is still the best price per BTU at higher price points. It is also cleaner and more abundant than oil. It can replace oil for any use and will be a permanent cap on oil prices over the long term.
  • Alessio on January 24 2017 said:
    Thank you Arthur for your article, it is very useful.
    I am a "young" Natgas trader and I have a couple of questions for you related to your article:

    1) You say that production is decreasing but what about the fact every week new rigs are added? Aren't they enough then to keep the pace of domestic and foreign demands?

    2) Can we say that 3$ is going to become a strng floor for price?


    Thank you


    Alessio
  • Ralph Kehle on January 24 2017 said:
    Art -- You must have been in a hurry. The vertical axis on Fig. 2 should read "Trillions of Cubic Feet", not billions. Text ought to be change to reflect this.
  • Vehbi on January 25 2017 said:
    Is not really cheap
  • Syd M. on March 25 2017 said:
    Not sure about that comment from the EIA that gas storage has fallen under 5 year average. It is well known that we are currently 15% over 5 year average. Could you explain the difference?

    https://www.eia.gov/naturalgas/weekly/

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News