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Natural Gas: Better Days Ahead....in Two Years
By Dian L. Chu, EconForecast
Natural gas posted the first weekly increase this month in the week of Nov. 14, on forecasts of colder than normal temperatures in most of the eastern U.S. from Nov. 24 through Nov. 28, which could spur an average 20 percentage rise above the normal heating demand.
Natural gas for December delivery—down 25 percent this year—gained 9.6 percent in one week to settle at $4.164 per Mmbtu on the NYMEX.
Temporary Seasonal Strength
However, this temporary seasonal strength does not alter the fact that U.S. gas stockpiles climbed to an unprecedented 3.843 trillion cubic feet in the week ended Nov. 12—9.3 percent above the five-year average level and 0.3 percent above last year’s level. (Fig. 1)
This storage glut has pushed U.S. natural gas at Henry Hub to its cheapest level in 11 months relative to Canadian gas (at 5 cents below), based on Bloomberg data. Henry hub benchmark has been traded at an average of 85 cents premium to the Canadian benchmark AECO for the past 10 years.
Drowning in Natgas?
As I said before that we are literally swimming in crude oil amid high inventory; but when it comes to natural gas, “drowning” would be a more appropriate description. While crude was hammered by China’s efforts to curb inflation, natural gas has an even bigger problem--nowhere to go--since it is region bound, and not as widely traded.
Worse yet, the latest short-term outlook published on Nov.9 by the Dept. of Energy estimates natural gas production will rise in 2010 to the highest level in 37 years. Marketed natural gas production is forecast to increase by 2.5 percent this year, and fall by 1.2 percent in 2011.
However, the drop in 2011 is not because of a decrease in shale gas production, but mostly a result of a 13.5-percent production decline in GOM production from the 2010 drilling moratorium.
Shale Surge
U.S. has seen a surge in natural gas output in the past two years (Fig. 2) with an increase in gas drilling from shale formations (Fig.3). During this time frame, the market equilibrium is distorted mostly by drilling activities supported through joint ventures with foreign oil majors and national oil companies (NOCs), held by production lease (drill or lose), and producers’ favorable hedging positions.
Gas Rig Count Has To Drop
Some industry experts estimate that gas rig count needs see as much as 20% drop--to around 750—from the current 936 (as of Nov. 19) in the next 12 months just to keep production from growing.
The actual number of rigs required to hold production flat could even be lower due to the increased efficiency of new generation high tech rigs, and pad drilling.
Now, looking ahead, this rig count correction could actually start to take place by mid next year supported by the following factors:
- Operators are unlikely to find hedge support as favorable as that from the past.
- Easing of Held by Production – most will be held by mid 2011
- Some cost carries from joint venture are beginning to run out
- Drilling shifted from gas to oil and liquid rich plays due to more attractive oil prices (Fig. 4)
- Economics kicking in – since most shale gas wells need around $5 per mcf to meet returns
- Coal to gas switch from the power generation sector due to new EPA CO2 reduction rules and lower natual gas prices
Unfortunately, the production boom for the last two years also means the price would remain sub-$5 for the next two years, amid the sub par GDP growth and demand outlook (Fig. 5)….unless several Katrina’s end up landing on the Gulf Coast.
Glut Set To Last 10 Years
Gas abundance is not limited to the U.S. The latest World Energy Outlook report by the International Energy Agency (IEA) released in early November basically threw the entire natural gas market under the bus by predicting the glut will worsen next year and last for 10 years, which will only fade gradually as demand rises strongly in China.
Future in LNG?
Nevertheless, news is coming out of China that the nation might see its natural gas supply fail to meet 35 percent of the demand in 2011, and the shortage could persist through 2021, according to China Business News.
Meanwhile, Platts reported that the significant arbitrage between UK ICE futures over U.S. prices--$3.357/MMBtu on November 8--has landed the first LNG cargo in 50 years from the U.S. Sabine Pass re-export terminal on UK's Isle of Grain import terminal.
While several import facilities were planned and built (before unconventional gas even came into the picture) in anticipation of high LNG imports in the coming decades, the U.S. has very limited LNG export capability. That could be about to change.
There are two LNG export facilities announced this year--Freeport LNG and Australia's Macquarie Bank have agreed to build one in Texas to export 1.4 billion cubic feet per day of gas, and Cheniere Energy's will be on the site of its Sabine Pass facility to export 16 million metric tons per year. Both plan to produce and export LNG by 2015.
So, while natural gas' green prospect is tied up in the legislative pipeline, it seems the more exciting aspect in the otherwise melancholy natural gas market could come from the LNG sector in the medium term.
Dian L. Chu, Nov. 21, 2010 Follow 
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If this saves my HEMI, I'm all in....and I'm going to assemble a natgas play for my 4yo daughter over the next s. College money someday.
Sure smells like a bottom to me.
You are not the only one smelling a bottom.
Look at the charts for Cheniere. Looks like to me the "Smart Money" has already found the bottom.
Of course, I don't think its a very good idea to create a huge position right now due to seasonal factors and other risks but I will be averaging with great patience.
Good luck to you too!
Given the ease of converting any car or truck to CNG and the resulting cost savings, it is a wonder that we have not seen more people opting to do this during our tight economic times.
I would think that if this idea caught on, we might see a big dent put in the natural gas glut.
For anyone interested, just Google "convert my car to CNG"...you'll be surprised at how simple it is and how environmentally friendly the results are.
It is theoretically easy to make the conversion.
If you look at the requirements to make it legal you will come to a different conclusioon.
Augustus...go on...tell me WHERE and HOW to find out more about the 'Legal Stuff' something here you know personally or can steer me to some documentation...what, for instance, would a good Google/Yahoo search term..? Indeed i'd bet that there just might, legally be a subsidy payment from the state, and privilege...such as a free ticket to ride the 'commuter/bus' lanes....encouragement...
Thank you!
I was thinking about going long natural gas for the long run and was doing a very similar research.
I took this news as pretty bullish as well.
http://www.reuters.com/article/idUSTRE6A826520101109
anvILL---you new to this?? I don't want to insult your intelligence but there is a little something called supply and demand. Shale gas being explored and tapped out of the ground means higher supplies of natural gas. Higher supplies of natural gas mean lower prices. I don't know how much gas Dian Chu owns.
Question: You mix high supplies of natural gas with roughly 10 years of slow economic growth and you know what you get??
Answer: anvILL scratching her head in about 5 years wondering why she was so stupid to invest in natural gas.
I've been trading stocks since high school, so not really new in trading but completely new to natural gas. So I'm not taking huge positions; 10% of my portfolio is the upper limit, probably somewhere around 7% will be the outcome. Fortunately, I'm not dumb enough to lose my fortune in a bottom picking game, so I won't be scratching my head even if it went to zero.
However, I am betting that the "simple economics" Dian pointed out will work out one way or another over the years. This price is unsustainable because before my natural gas ETF goes down to zero, there would be enough natural gas firms that would be out of business which would bring the price back up or at least back stop it to a certain degree. Also, I think the lack of liquidification plants in the US is quite significant. I believe there is only one in Alaska, so I think there is a fair risk and return in the LNG play. There is plenty of natural gas in the US, but not as much in liquid form.
All this being said, at the end of the day, its only a matter of risk and return...
I've been in-and-out of natural gas interests at the lease holder level and in the markets for going on 30 years. I got out entirely just over two years ago due in part to the timing on a "lucky"divorce. Been through the boom of the late 70's, bust of 80's, boom of the late 90's etc. and am a long term bull. But in my view the risk return balance is way off on the risk end. Supply overhang and uncertain growth prospects make this a dead zone as far as I can see.
Thanks for your advice.
I guess I am going to stay away for at least a year or two, but will keep an eye on it for the bull market that will eventually come in the years to come.
thanks a lot...LNG/methane CH4 is the future....direct burning hydrogen/oxygen + carbon/oxygen, and better, synthesis gas for making gasoline/octane, plastics, everything...Peak Oil indeed has caused ridiculous efforts at finds in 12,500 water depths along with 20,000 additional feet bedrock...time to MAKE GASOLINE from the 100++ year World supply of Methane..
a much much longer transitional historic developement time towards fission nuclear, fusion nuclear, cost-effective solar, and smart power grids...
Not sure how to make money out of this...USA methane is now priced kinda like USA texas oil in 1933...way way too cheap...