• 1 hour Iraq Struggles To Replace Damaged Kirkuk Equipment As Output Falls
  • 6 hours British Utility Companies Brace For Major Reforms
  • 10 hours Montenegro A ‘Sweet Spot’ Of Untapped Oil, Gas In The Adriatic
  • 12 hours Rosneft CEO: Rising U.S. Shale A Downside Risk To Oil Prices
  • 13 hours Brazil Could Invite More Bids For Unsold Pre-Salt Oil Blocks
  • 14 hours OPEC/Non-OPEC Seek Consensus On Deal Before Nov Summit
  • 15 hours London Stock Exchange Boss Defends Push To Win Aramco IPO
  • 16 hours Rosneft Signs $400M Deal With Kurdistan
  • 19 hours Kinder Morgan Warns About Trans Mountain Delays
  • 1 day India, China, U.S., Complain Of Venezuelan Crude Oil Quality Issues
  • 1 day Kurdish Kirkuk-Ceyhan Crude Oil Flows Plunge To 225,000 Bpd
  • 1 day Russia, Saudis Team Up To Boost Fracking Tech
  • 2 days Conflicting News Spurs Doubt On Aramco IPO
  • 2 days Exxon Starts Production At New Refinery In Texas
  • 2 days Iraq Asks BP To Redevelop Kirkuk Oil Fields
  • 3 days Oil Prices Rise After U.S. API Reports Strong Crude Inventory Draw
  • 3 days Oil Gains Spur Growth In Canada’s Oil Cities
  • 3 days China To Take 5% Of Rosneft’s Output In New Deal
  • 3 days UAE Oil Giant Seeks Partnership For Possible IPO
  • 3 days Planting Trees Could Cut Emissions As Much As Quitting Oil
  • 3 days VW Fails To Secure Critical Commodity For EVs
  • 3 days Enbridge Pipeline Expansion Finally Approved
  • 3 days Iraqi Forces Seize Control Of North Oil Co Fields In Kirkuk
  • 3 days OPEC Oil Deal Compliance Falls To 86%
  • 3 days U.S. Oil Production To Increase in November As Rig Count Falls
  • 4 days Gazprom Neft Unhappy With OPEC-Russia Production Cut Deal
  • 4 days Disputed Venezuelan Vote Could Lead To More Sanctions, Clashes
  • 4 days EU Urges U.S. Congress To Protect Iran Nuclear Deal
  • 4 days Oil Rig Explosion In Louisiana Leaves 7 Injured, 1 Still Missing
  • 4 days Aramco Says No Plans To Shelve IPO
  • 6 days Trump Passes Iran Nuclear Deal Back to Congress
  • 6 days Texas Shutters More Coal-Fired Plants
  • 7 days Oil Trading Firm Expects Unprecedented U.S. Crude Exports
  • 7 days UK’s FCA Met With Aramco Prior To Proposing Listing Rule Change
  • 7 days Chevron Quits Australian Deepwater Oil Exploration
  • 7 days Europe Braces For End Of Iran Nuclear Deal
  • 7 days Renewable Energy Startup Powering Native American Protest Camp
  • 7 days Husky Energy Set To Restart Pipeline
  • 7 days Russia, Morocco Sign String Of Energy And Military Deals
  • 8 days Norway Looks To Cut Some Of Its Generous Tax Breaks For EVs

Why Natural Gas Prices Collapsed

Why Natural Gas Prices Collapsed

Today I want to provide an update on the natural gas picture, as prices declined sharply at the end of July. I have laid out the argument since last winter that because of the deep inventory hole that developed over the course of the exceptionally cold winter, natural gas prices would remain high relative to last year, and that as a result natural gas producers would likely report higher year-over-year profits. (For background on the inventory picture, see my February column Natural Gas Inventories are Headed Toward Zero).

First, let’s look at what natural gas prices have done since winter. The chart below from the Energy Information Administration (EIA) shows that natural gas prices have been higher this year than they were either of the past two years as expected, but that toward the end of July the price fell sharply.

Henry Hub Gas Price

So what has happened? Two things. The first is that producers have been producing at higher rates than they were either of the past two springs. Thus, on the supply side the situation looks pretty good. In fact, the EIA recently reported that natural gas production in the Marcellus Shale region had exceeded 15 billion cubic feet per day (Bcf/d) for the first time ever.

But the bigger issue — as it was in the winter — has been unseasonable weather. Generally in the summer demand for natural gas spikes as utilities react to increased loads from air conditioners. This summer has been like this past winter — cooler than normal. In fact, this summer is flirting with record cool temperatures across many cities across the US, and that has reduced the demand for natural gas. This has meant that inventories are recovering faster than expected, and that has reduced the fear premium that existed in early spring. Gas inventories are still below normal for this time of year, but the potential for more cool weather has investors betting that inventories will be in good shape once high demand season begins:

Working Gas

Natural gas producers have been reporting higher year-over-year earnings as I expected, but many have sold off over the past month due to concerns about shrinking margins. Natural gas prices have recovered some of the year-over-year premium in recent days — the current price of $3.97 per million British thermal units (MMBtu) is $0.63/MMBtu higher than the price a year ago — but if the summer continues to be cool it is much less certain that premium will be maintained.

One word of caution though is not to be confused by natural gas seasonal pricing effects. When I argue that natural gas prices will be higher, I have always tried to make it clear that I am referring to year-over-year prices, which will impact year-over-year profits for gas producers. But July gas contracts will generally be cheaper than February contracts because of seasonal demand. So you can expect in most cases gas prices to actually decline between winter and summer, but the year-over-year differential is what is important.

Conclusions

My thesis last winter was that low inventories would lead to higher year-over-year natural gas pricing, and that has proven accurate through the end of July. Year-over-year profits for gas producers have been higher. But a cool summer has meant that inventories have headed toward normal levels faster than expected.

Weather is always a short term risk factor in the natural gas market. If this winter resembles last winter, we will again see high natural gas prices, especially if we don’t recover to normal inventory levels by the start of injection season in ~mid-November. (Inventories are still 20% below the 5-year average for this time of year). But as recently as 2012 we had an unseasonably warm winter, and natural gas prices collapsed in response.

If you are a long-term investor in natural gas companies or infrastructure providers, these seasonal fluctuations are not important. Over time, they will average themselves out, and there are a number of factors that argue that natural gas prices will move higher than may be implied by natural gas futures prices.

By. Robert Rapier

Link to Original Article: Why Natural Gas Prices Collapsed




Back to homepage


Leave a comment
  • Ron Wagner on August 15 2014 said:
    It seems to me that long range worldwide prices will be low. I am talking over the next few decades. I see this because of fracking and horizontal drilling becoming a more widely spread technology worldwide. China will pull out all stops in production and use of CNG and LNG. Europe wants to copy our success. Russia, Africa, Australia, the Middle East et all want to produce use and sell natural gas. This trend will also reduce the preference and pricing of oil and gasoline. CNG and LNG are far less expensive and it is only rational to use a cleaner and less expensive fuel for ships, locomotives, trucks, cars et all.

    See Useful References for The Natural Gas Revolution: https://docs.google.com/document/d/19Yf0MWpo91vrlu-mmJtjB1ERukjJo5W41oi4RZVQBug/edit

Leave a comment




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