Even with strong signs that global economic weakness will persist through 2009, investors in energy share hope for an oil price rebound sooner rather than later, and energy stocks staged an even bigger move than the overall market in the last two rallies But the fixation on oil tends to obscure the prospects for the natural gas market.
An article in Platts (hat tip reader Michael) suggests that oversupply will lower natural gas prices (currently at $6.79 per MMBtu) to the %5 to $6 range. A mild winter could lead to prices as low as $4/MMBtu.
From Platts:
Oversupply from shale gas production success will keep natural gas prices in the $5 to $6/MMBtu range for the next five years, said Jen Snyder, head of Wood Mackenzie North American Gas Research.
“We are now in a position of significant potential oversupply brought about by the huge success experienced in the development of shale gas plays,” Snyder said …
While “most commentators are pointing towards prices settling at the marginal cost of the most expensive shale plays, we think this is a mistaken reading of the current and future environment,” Snyder said. “Simply stated, there is no requirement for the rapid near- to mid-term development of some of the more expensive or challenging shales such as the Marcellus or Horn River; the market can be adequately supplied without these volumes.”
Snyder said there are “sufficient volumes available at a development break-even price of $5.50[/MMBtu] or below for the market to balance.”
Wood Mackenzie’s conclusions through the year 2014 take into account demand declines from a prolonged recession through the fourth quarter of 2010, new wind- and coal-fired capacity to serve power loads and a significant drop in drilling in response to lower prices, she explained…..
Furthermore, that price range is not a floor, Snyder said.
While a severely cold winter could further tighten the market, a mild winter conversely could exacerbate the current oversupply and lead near-term prices into the $4/MMBtu range, she said. The price forecast also assumes a 1.5 Bcf/d switch from coal- to gas-fired power generation. “If this fails to materialize, due to collapsing coal prices, this would further add to short-term price weakness,” she added.
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Except that with the dramatic fall in price many of the small to medium size companies will be going bankrupt and their wells capped.
There is already a severe credit crunch in the oil and gas fields for all except the very largest most well capitalized comapnies.
Much of this newly discovered nat gas will not be developed and much of it capped.
Great news. Inpex is planning on building a gas plant in my home town – hope these prices make them abandon the project.
A nice under looked part of Waxman replacing Dingle as head of the Energy commite is he opposition to Hydraulic fracturing. If his new rules are put into place you could see all new Natural Gas production shut down for a year or two.
Given the huge decline rates in NG that will be fun for the energy markets.
$2 is also on the table, a longterm price support level.
Via Fadel Gheit note from yesterday:
“the unprecedented rise in oil prices resulted in bad investmnets by the industry as companies lost their discipline in chasing the oil bubble…investments that do not yield returns above the cost of capital at $60/b oil or $6/mcf gas are doomed to fail.”
We’ve had numerous consecutive builds in nat gas inventories, though the cold season has yet to shift into full gear.
However, keep in mind nat gas fell to sub $3 levels during the last recession, yet this recession is quite possibly worse, both in terms of industrial and consumer demand.
Prop 10 didn’t pass on the west coast. So it appears that since 2002, there has been little net adds in terms of demand for nat gas (see here). Yet we have dramatically increased supply.
To mmckinl’s point: “Much of this newly discovered nat gas will not be developed and much of it capped.” — And that’s by virtue of the bad investment decisions of nat gas co mgmt. (My pet theory is McClendon and TBoone went on TV to plead for nat gas and hope that demand would materialize at these unsustainable prices and make them a lot more rich.) So yes it will be capped, but thats only after a lot of pain.
i discount platts normally and particularly here..there is a great consensus for natural gas prices to rise a bit. also notice it has been the steadiest of commodities