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Kent Moors

Kent Moors

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk management, emerging market economic development, and market risk assessment. His…

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Are NatGas Prices About To Explode?

natural gas

American natural gas prices are at their lowest since February.

As I write this, Henry Hub (the primary confluence of pipelines in northern Louisiana at which the NYSE daily futures contract price is pegged) is off 11 cents to $2.79 per thousand cubic feet (or million BTUs), having lost 8.8 percent in value for the week and 12 percent for the month.

The reason is simple: overall demand is coming in lower than this time last year.

But that’s not going to last for much longer.

You see, there is a major catalyst in the natural gas market that could soon send prices through the roof in 2018.

Here’s how…

Natural Gas Price Squeeze

The reason why American natural gas prices have plummeted boils down to two things:

• An excess of supply;
• And unusually warm weather.

Most of the retreat is tied to the supply side.

Expectations by year-end indicate that natural gas demand will be down 3 percent with production up 7 percent.

In a nutshell, that is the reason for the pricing squeeze.

Yet here is where it gets interesting.

Quarterly natural gas production estimates have been trending downward lately.

Current analyst projections average 77.1 billion cubic feet/day (bcf/d) in December and January, lower than the 84.6 bcf/d expected for the figures through Friday of this week.

We are moving toward a supply balance deficit of slightly less than 40 bcf/d. This is the first negative physical balance since mid-March.

The wildcard is now the weather.

Assuming we have a normal winter, there should be a base forming to support a slow rise in price from about $3 per 1,000 cubic feet.

However, this also has a downside.

A stable floor at $3 will encourage some new drilling (since it is marginally profitable in many drilling basins at that price).

But that doesn’t mean there aren’t bullish indicators for American natural gas prices going forward.

Actually, it’s quite the opposite.

A Bullish Case For Natural Gas

Now, both factors I mentioned above (volume in the market and the weather) are expected to provide an improving environment for rising prices.

In addition, drawdowns are increasing from storage, another factor that should stimulate market price, and exports of both pipelined and liquefied volume, are up more than 20 percent year-on-year.

In fact, according to the EIA, aggregate weekly figures for national demand have been sitting above a nine-year average since late February.

We also have to consider that takes longer to factor in the impact on supply from actual changes in drilling.

And there are two overriding reasons why.

First, at least 80-85 percent of natural gas drilling expenses are front-loaded.

An operating company has already spent the bulk of its funds before anything comes out of the ground. Related: Is Oil About To Collapse?

Bottom-line considerations oblige that the volume moves into the market to defray expenses even if the price is declining.

Second, primary production flow – especially from shale and tight gas formations – occurs in the first 18 months.

Thereafter, a reduced but continuing flow still takes place. That assumes the company decides not to re-frack wells.

Both take place because recovery of investment needs to occur virtually regardless of the market pricing that exists.

But there is another piece of the puzzle we have to factor in – liquefied natural gas (LNG) exports

New LNG demand is emerging across the board.

We’re talking about everything from LNG export consignments, electricity, industrial use, and vehicle fuel, all of which points toward an uptick in demand moving forward.

And right now, there is one country in particular that is proving even hungrier for U.S. LNG than expected…

The “Red Dragon’s” Natural Gas Dependence

When we look at China, natural gas prices have been skyrocketing.

The domestic market prices are strictly regulated by the government, but the cost to supply is generating a widening deficit and increasing regional shortages.

Unlike the U.S., China is depended upon imports to satisfy the local gas demand.

An acute supply balance problem obliged Beijing earlier this week to order eight regions “regulate” surging gas prices amid winter heating demand and the switch to gas from coal.

According to a National Development and Reform Commission (NDRC) official, the eight regions are the leading natural gas producing regions of Shaanxi, Inner Mongolia, Xinjiang, and Sichuan, as well as the biggest gas-consuming regions Hebei, Jiangsu, Liaoning, and Beijing.

Chinese traders have been buying up LNG cargoes on the spot market, pushing spot prices higher than the prices of the oil-indexed LNG cargos in the long-term delivery contracts.

At the beginning of this week, post regasification wholesale LNG prices in Inner Mongolia were as high as 7,750 yuan ($1,172) per ton (equivalent to $24.06 per 1,000 cubic feet) and 8,050 yuan ($1,217.35) per ton ($25.00 per 1,000 cubic feet) in Shaanxi on Monday.

Price increases, according to the Jiangsu-based LNG price monitor market, ranged between 7.6 percent and 11.8 percent in a single week.

As a result, Asia’s LNG spot prices have increased to their highest since January 2015 due to the Chinese demand and strong oil prices.

Further, Chinese LNG imports between January and October of this year (the most recent available) are significantly up soared 47 percent compared to the same period last year, according to Platts.

Initial shipping data for November indicate that Chinese LNG imports hit a record in November, exceeding the 4-million-ton level for the first time ever.

The previous monthly record had been 3.7 million tons set in December last year.

Yet, even with surging LNG imports, Chinese regions in the north have been experiencing shortages in gas supplies for weeks.

According to media accounts, there was rationing of natural gas last week Hebei, the industrial province Hebei surrounding Beijing.

Ultimately, China expects to meet its expanding natural gas and power needs by exploiting the world’s largest shale gas reserves.

That will be a boon to U.S. providers of services, technology, and expertise.

As demand continues to accelerate, especially as Beijing increasingly moves from coal to natural gas for electricity production, China will be increasingly relying on LNG imports.

Therein lies a very interesting, and potentially lucrative, U.S.-China trading venue.

By Kent Moors

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Leave a comment
  • Citizen Oil on December 11 2017 said:
    The answer to your question is no. NG prices are not about to "explode" They will be damaged for the foreseeable future and have been since 2008. Fracking has destroyed the more local NG market and will so for the foreseeable future. Shale oil associated gas is about to arrive exponentially with not enough capacity to get it to market. This in turn is destroying the Canadian NG market. These greedy companies are so used to this awful market, it's what they expect.
  • Mike Hawk on December 12 2017 said:
    That is not what is "destroying the Canadian NG market". The citizens of BC and Canada who vote these socialist governments in, (who think money magically appears to donate to the losers of the system) that don't support getting our valuable assets to international markets. That is what is destroying our NG market.
  • John graham on December 12 2017 said:
    So supply and demand doesn't mean much to you and LNG going overseas and the building of more capacity to ship same means nothing. As a driller, we have not had many years lately with Gas prices stimulating pure gas drilling. Yes it is a by product of oil production but the scale is no where near what it takes to satisfy a growing market thanks to Trump.
    Today a release of small business outlook is the highest in 34 years. As a small business man myself, i can relate. Finally no more stupid running this country like we had for 8 years. The make fun of Trump drinking diet Coke but nothing about a dope smoker, cocaine snorter for 8 years that never had a job before.
  • Citizen Oil on December 12 2017 said:
    Mike Hawk, LNG leaving Vancouver ports is a long way off and not even a consideration on the demand side for years to come. Right now the USA is producing so much NG it is displacing the need for CDN gas. You are preaching to the choir, I know the NIMBY Dumb Party is useless but right now it is the USA that is killing us.
  • Mike jones on December 12 2017 said:
    Anybody invested in the n g Market should be happy that Donald Trump has set us on a path to World War 3 everybody knows how closely oil and gas prices correspond so let's get those factories cranking out new armament let's get those electric meter spinning and I are liquid natural gas to foreign markets. When Donald Trump took office he said he was going to boost the economy and everybody knows nothing boost the US economy like War the bushes made billions of dollars is in iraq and Afghanistan now it's Trump's turn in Korea I'm sure they have plenty of heroin to export I find it very interesting that heroin prices have dropped by 65% over the last 10 years I guess that's Obamacare so let's kill off an entire generation poison the environment and get rich doing it. Go Trump
  • Dick Johnson on December 17 2017 said:
    The world is awash in natural gas, onshore, offshore, wherever. There are new massive discoveries all the time and natgas has had a hard time staying at or above $3/1,000 cf forever. The infrastructure for charging electric cars is already in place- just google some maps. Advancements in battery technology will make any upswing in natgas prices short lived at best. See the US Drought Monitor page for weather outlooks in the US over the next year or two- no bull market there either.

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