The Natural Gas Massacre And Price Spikes

Wolf Richter's picture

Wolf Richter

Forecasting the price of natural gas is easy. The US Energy Information Agency (EIA) does it regularly, and like all seasoned forecasters, it produces a slightly wobbly line that is trending either slightly higher or slightly lower. The graph below shows what this exercise looks like. Given that the dip before the dotted line was the April low of $1.90 per million Btu (MMBtu) at the Henry Hub, a decade low, the slight upward trend seems reasonable.


So, we expect smooth sailing, with gently rising prices as is appropriate for the relaxing calm that reigns in the natural gas market. Alas, reality is a series of violent ups and down with sporadic and vicious spikes.




Natural gas prices in the US have been so low for so long that producers are running into trouble. While up 46% from the April low, the recent price of $2.79/MMBtu at the Henry Hub is still too low to drill economically. Losses out into the horizon. Plunging drilling activity. Rig count down 41% from last July, at the lowest level since August 1999. A nightmare for producers. And some will go out of business.

Yet it's a conundrum in our globalized economy; or rather, proof that we don’t have a globalized economy, not when it comes to natural gas: liquefied natural gas (LNG) trades in the international markets for several times the US price.

Japan has always paid the highest price (the “Japanese price,” as a sales lady in a museum shop in Korea once whispered to me as she slashed the price of an item I was ogling). But even that Japanese price jumped following the earthquake last year, when Japan shut down its nuclear power plants one by one. By May none were operating ... though the first one is now back on line [for the shenanigans of the Japanese nuclear power industry and the rebellion against it, read.... Whitewash versus Reality: “Disaster Made in Japan”].

The hole—nearly 30% of Japan’s power generation—had to be filled. Conservation covered part of it. Switching to natural gas filled the rest. But it drove up demand that whipped prices into a froth at over $17/MMBtu. In Europe, LNG prices have hovered at almost $10/MMBtu, except for earlier this year, when they spiked to, well, Japanese levels.

Japan pays almost 7 times the price that gas trades for at the Henry Hub—because the Henry Hub is irrelevant. US natural gas is landlocked. Even in the US, there are distribution bottlenecks and demand variations that can produce violent local price spikes. Early January, while gas traded for around $3/MMBtu at the Henry Hub, New York experienced a spike and paid nearly $12/MMBtu! In March, as natural gas was drifting towards its decade low at the Henry Hub, Boston briefly paid nearly $9/MMBtu. Natural gas got massacred in one place and spiked in another!



But the US natural gas market isn’t totally landlocked. The US could import LNG from around the world, and it did when prices were higher, but that has ground to a halt, and LNG import terminals are used for storage. The US does import natural gas from Canada via pipeline, but on a declining trajectory.

And the US exports natural gas. Just not LNG. There are no active LNG export terminals in the US, though given the phenomenal price differentials, nine are planned. One of them, the Sabine Pass facility, has already received DOE authorization to export domestically produced LNG. Exports by pipeline to Canada and Mexico have been growing, but are still less than 7% of US production. That the US imports more than that from Canada may sound contradictory, but remember the New York and Boston price spikes: natural gas is local.



So, near term, exports won’t have much impact on the price of natural gas. But US production appears to have peaked, finally, or maybe, after a historic supply-and-demand mismatch that forced prices into the basement of maximum pain. On a weekly basis, according to the EIA, production is still between 3% and 4% higher than the same week last year. However, given the collapse in drilling, production will eventually taper off, and might do so suddenly. Yet, demand from power generators has been skyrocketing as they’ve switched from coal to gas; and on a weekly basis, overall demand has jumped by over 10% when compared to the same week last year—and it’s burning up the record amount of gas in storage.

And the EIA forecast of a slight upward drift in price? Compared to the reality graph beneath it? Natural gas doesn’t correct to a sustainable price to maintain it. It’s an industry of violent spikes and horrific descents, precisely because transportation is an issue. Oversupply can’t be corrected by exporting; it causes prices to plunge. And a shortage—a scenario the US may be facing at current trends—will be corrected initially by importing LNG in competition with the rest of the world. So prices may spike once again.

Meanwhile, in the shakeout, less efficient or poorly capitalized producers are wiped out. Capitalism’s creative destruction. But the price has been below the cost of production for years, and the damage is now huge. Read.... Natural Gas: Where Endless Money Went to Die.

And Malaysia’s state-owned (!) oil and gas company just plunked down $5.5 billion for a foothold in Canada's shale gas scene—even though the odds of securing permission to export LNG are poor, the costs of such an endeavor immense, and the timeline very long. For a look at another aspect of the new cold war, and who might be winning it, read Marin Katusa's excellent....  The Global Race for Energy Resources.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
CEOoftheSOFA's picture

Here's part of the problem:  It took me 10 years to get Elizabethtown Gas (the local gas utility) to run a gas line to my house and I only live 100 feet from a gas line.  I had to get 3 other neighbors to sign up before they would run it.  Another neighborhood in town has 250 houses on electric heat and they desperately want gas but the gas company is indifferent.  The problem is that the State of New Jersey has eliminated the incentive to expand the grid due to regulations and price controls.   

Catullus's picture

Everyone knows about city-gate Transport constraints into the northeast. No big deal. Very few people buy at the $9 price. LNG is imported into New England. Suez brings a big tanker into the Harbor every month or so.

Gas is cheap because it is abundant. The drop off rates in fracking sited is modeled, not recorded actuals. The coal to gas switching has already occurred and is fully priced in. A return to $4 gas at this price of coal will cause the switching to reverse. The US is decidedly not Japan when it comes to energy markets.

Oh, and there's still a record amount of gas in storage.

And who cares what it "costs" to get it out of ground? Those production companies can default or get bought out below book value and then what does it "cost" the new owner at the lower price entry point? It's not like you shut production because the title to the well changed hands.

Don't bother playing natural gas. You can't win even if you're a large trading shop.

overmedicatedundersexed's picture

FLack is paid by the word, he is making a killing posting his science here. I challanged him once on science on MMGW and % co2 vs h20 vapor in the atmosphere and like vapor he dissapated faster then dry ice in a microwave.

Flakmeister's picture

Would you like to play?

Does H20 condense out of the atmosphere? Is there a limit to the amount of WV as a function of temperature?

Let's sort out the basics and then we'll go into details... kay?

overmedicatedundersexed's picture

lets play, does co2 get scrubbed from the atmosphere hint think sea shells..LOL so easy

Flakmeister's picture

Oh goodie...

Could you demonstrate the amount of anthropogenic C02 emitted annually is less than the measured increase in the atmosphere?

Oh yeah quit changing the subject.... I thought you were going to school me on H20 and C02 as GHG, or did you already give up?

overmedicatedundersexed's picture

flak circles are for crops, so stop going in them. hint crops and co2, one could ask what mt st helens added to the whole sheebag or all the other volcanic activity vs man. but why go there as you twist science and logic to look the expert. if your base is sand nothing can change that, carbon is a natural element why hate?

Flakmeister's picture

Do you practice being a fool or did it come naturally?

Volcanos are ~1% of anthropogenic emissions... and in case you didn't know large eruptions are associated with short term cooling....

So is Fluorine, why don't you go inhale some? Or eat some Sodium....

overmedicatedundersexed's picture

"Volcanos are ~1% of anthropogenic emissions"..sure sure, you don't work for the BLS? well maybe you do, that sure would explain their data as well. garbage comment.

overmedicatedundersexed's picture

did you read that garbage science..they cannot measure co2 from volcanic irruptions so they estimate, you know like using computer projections to predict global weather.. the stated objective of the article was to prove a MMGW point. as I said garbage science forms your base of sand.

Flakmeister's picture

Buddy... the onus on you is show where the C02 comes from if you do not believe the papers...

Also, if you were correct, you would be able to show that large volcanic eruptions are corrrelated with temperature increases not decreases..

Hint look up Pinutubo:


So, you have demonstrated a complete ignorance of what is actually observed....Somehow, I am not surprised... 


Now, could you explain what would happen to the earths temperature if you could remove all C02 and H20 vapor?

This should be a laugh...

You should also explain to us all the last table here


overmedicatedundersexed's picture

Flak as someone educated in science, I think you know very well about bias in studies.

the onus is not on me, if anything it's on you MMGW zealots to have hard science to back up the threats that you promote.

as for the observation of global cooling after eruptions, that is fact and does not support incr of co2 by said eruptions cause warming,,you know your thesis that co2 incr means warming, I do not support the idea that co2 is anyway linked to warming ..your the one spouting that rubbish.

as I said you go round n round trying to support what is a fairy tale. too bad a mind is a terrible thing to waste.

Flakmeister's picture

If you were even remotely correct you could come up with a coherent, internally consistent argument to that effect..

And you haven't even come close...

Based on what you have wrote, you are too fucking thick to realize how fucking thick you are:

The above study was about people just like you....


overmedicatedundersexed's picture

oh my name calling is all that is left is it flak? looking at your assumptions is just too painful I guess.

just like the energy crisis , which is caused in major part by the Fed and State gov regulations that are stopping USA energy production, the crisis is else were in in that big hot thing in the sky..

look to the sky Flak look to the sky.tip of the hat to "The Thing"

Flakmeister's picture

Yep... it was the regulations that caused Texas to peak in 1970... When did the commie vegans take over there?

Do you just make shit up?

Where is all this oil that regulations stop us from exploiting... are you sure that its oil?

Can you show evidence the sun is currently driving GW?

No, you can't... just give it up...

mt paul's picture

there is so much NG up the north slope

they just tourch it off 

or injected it back in the ground..

Flakmeister's picture

It is injected back into the ground to help maintain the oil well pressure.....

For example see

HungrySeagull's picture

To the Poster who wondered what would happen if LNG ships or ports were to go up...

sangell's picture

And where was Barack "Mr. Infrastructure" when he had all that ARRA money and fracking gas stopped his wind farms from 'blowin the wind' and cast a dark cloud over solar arrays? Was he putting his visionary mind to work and, instead of HSR boondoggles linking California Correctional facilities in the Central Valley together, thinking of new railroads out of the Powder River Basin to the modern ports on the West Coast where American coal could be shipped off to BTU hungry Asia? No, his empty mind only reverberated with the sound of Sierra Club opposition to that kind of 'infrastructure. Pipelines to bring gas to replace imported home heating oil to those blue New England states so they could stay warm cheaply during the long winters. No, Obama's mighty mind was devoid of any thoughts like that either. How about fast tracking Dominions plan to export Marcellus shale gas out of its LNG import terminal at Cove Point to Europe and get a twofer, more export revenue for us, less for Gazprom and the geopolitical bonus that entails. Nope, our far seeing president's eyes were blind to that opportunity as well.

blunderdog's picture

You think we need more government involvement in the economy?

JeffB's picture

I'd be happy if our government would leave the visionary stuff to private enterprise and just tried to help provide a fair and level playing field for all of the participants.

If they could figure out a way to minimize the political gamesmanship, I'd be fine with them internalizing costs such as pollution etc.

I think Thomas Jefferson was spot on with his "That government is best which governs the least."


adr's picture

"$2.79/MMBtu at the Henry Hub is still too low to drill economically"


Just like oil can no longer be drilled economically under $60 a barrel. I guess for 100 years everyone drilling oil and natural gas lost money. I seem to remember an average price of natural gas under $3 for a very long time without anyone complaining. Shoot the price over $14 and all of a sudden nobody can drill profitably at a higher price than the historical average.

In fact the average price was between $2.50-$3 for the entire decade of the '90s. It wasn't until the Commodity Futures Modernization Act that the price of nat gas, along with everything else, took off.

The spike in nat gas prices is 100% due to the leveraged increase in speculation, driven by contract flippers who have no business owning a contract for a commodity they will never use.

There is so much supply that can't be stored, gas rig operators are just burning it off.

sun tzu's picture

1) fracking costs more money


2) demand for NG is higher now as it is replacing coal powered plants


3) inflation in wages and drilling equipment


Your mindset is that since a burger used to cost $0.50 in 1979, it should still be $0.50 now, even thought the Fed has turned currency into toilet paper

Bunga Bunga's picture

$10/mmBTU for 10 years to reach the break even for shale gas production. The cheap gas/oil is all gone.

Flakmeister's picture

What's a taco at TacoBell go for nowadays?

Can you can still get the better part of a mcf for $3 so?

AGuy's picture

"Just like oil can no longer be drilled economically under $60 a barrel. I guess for 100 years everyone drilling oil and natural gas lost money."

It costs more to drill for oil offshore and to mine tar-sands oil. The higher the production costs the higher the price of oil will rise. During the 90's OPEC was pumping like mad, The UK was pumping like mad and China was a net exporter. Then by the end of the 1990s, a tipping point happened: China became the second biggest importer (instead of an exporter). UK production peaked and fell into step decline. The Middle East production could not mean increased global demand from Asia (China mostly but India too). Since convential on-shore oil fields have been largely depleted, the industry was forced to drill for unconventional oil (Deep water, Tar-sands, and tiny oil pockets). These are only profitable if when the price of oil is high. Unless global demand suddenly collapses, the price of Oil will remain high. With one exception: Since the global economy is dependent on Oil, high prices will cause economic contraction. This will lead to demand destruction which results in lower oil prices. Over time the economy adjusts, and demand for oil increases. It will increase until prices rise to another tipping point, which causes a repeat of demand destruction. The cycle will repeat, but the prices floor will rise over time as more conventional production depletes and more replacement production is from unconventionall drilling (with higher costs).

"The spike in nat gas prices is 100% due to the leveraged increase in speculation, driven by contract flippers who have no business owning a contract for a commodity they will never use."

NatGas will rise, the only reason why it tumbled recently is because of fracking fraud, much like the dot-com bubble and the housing bubble there is a fracking bubble, which finally reach its tipping point early this year as the number NatGas drilling rigs crashed. For Fracking to be profitable, the price of NatGas needs to be between $12 and $16 per MMBTU (depending on the formation and the distance to run pipelines).

See chart of Oil/Natgas Drilling rigs:

Excluding any major US economic contraction (deflation). The price of NatGas will rise until Fracking become profitable again (somewhere betweeen $12 and $16 MMBTU).

Flakmeister's picture

I'll quibble...  you can argue that $7.50 per mcf is the magic number and NGL are the gravy....

G-R-U-N-T's picture

Hey Fm,

FYI.....Your IPCC ACO2 causes atmospheric temperature change, tax the air we exhale, loot the masses fraud hero's have fallen from grace yet again....

Please be advised!





Flakmeister's picture


By some chance, are you from Texas?

This recent thing about "Critical Thinking" and the Texas GOP made me think of you and Lowprofile...

Seriously, you cannot make this shit up...

Flakmeister's picture

Take that up with the politicos... I only deal with science end of things...

You would be so far ahead if you spent 1/2 the time you wasted being in denial on learning what the fuck is really going on....

BTW,  the author of your article above is funded by the Heartland Institute, so if you want to believe the rantings of someone on the payroll of the Koch Bros. (once removed, so to speak) then you have shown that you are morally lax, easily fooled and possessing minimal critical thinking skills.....

modulo cum sale or so they say...

JeffB's picture

I'm certainly no expert on any of this, but don't think we should assume that the prices for nat gas in the '90s proves it can be profitably brought to market at those prices today.

The cost to bring oil to market, for instance, was far cheaper decades ago when shallow wells produced "gushers" that spouted oil hundreds of feet into the air, than it is now for the Canadian tar sands where trucks hauled muck to the refineries for processing.

Apparently fracking may be more expensive than the older style nat gas wells, per Mr. Pit ;) in an earlier article:

The Natural Gas Massacre Gets Bloodier

..."The industry even has a term for it: Ultimate Economic Recovery (UER), the quantity of gas a well produces over its life. Since no shale gas wells have lived through the entire lifecycle yet, UER numbers have to be estimated, and they now appear to be much lower than the initial industry estimates that were mostly hype. Whether or not a well is profitable over its life depends on the UER, the cost of drilling and maintaining the well, and the price of gas during that time. An excellent pricing model for the Barnett Shale field determined that a well might become profitable over its life if gas is at $8 per million Btu.

Even if the model is off a bit, it shows that the industry has been fracking at a steep loss for years. But due to the way gas drillers account for their wells by front-loading profits, the pain has mostly shown up in their ballooning debt and their current negative operating cash flows. Hence, Chesapeake's dire situation. Drillers have shifted whenever possible from drilling for natural gas to drilling for oil, which is still highly profitable. And so, the rig count for gas wells has been heading south, from over 900 last fall to 600 last week (Baker Hughes)." ...

Of course some producers are able to do so at lower costs than others, but prices are usually determined by the costs at the margins. The Saudis may be able to produce at a profit at lower prices than the Canadians, but they can't supply all of the world's oil needed on a daily basis. So if prices are below production costs for marginal producers, they're likely to wait until prices become profitable for them before starting any new projects.

I imagine the same could well be true for natural gas producers. Some might be losing money hand over fist, but are still producing because their marginal costs are less than current prices. Once they've already invested in the exploration, leases on the drilling rights, got all of the necessary local permits etc., assembled the necessary crews and equipment, secured the rights and infrastructure for all the water & other necessities and actually dug the well, it might be to their benefit to keep things going, even if in retrospect it's obvious they lost their shirts on a project. It can also make economic sense to flare off some of that gas if current storage is reaching capacity or would be too expensive to recapture some or all of it, such as at an oil well with some nat gas as a by-product.


Flakmeister's picture

Fracked NG is not cheap... compare the overall depth and length of the hz laterals to the old conventional wells... You also have the discount the production which tight, i.e. fracked resevoirs, exhibit; the drop off is enormous and only through exponential growth of wells can you maintain level production out of a field..... Rates typically  down 90% after 24 months...

 If you do not have associated liquids you are getting crucified with NG at $2.70 per mcf.....

Ckierst1's picture

Yeah man!  Them damn oilpatch dudes been printing inflation like wildmen!  I'm speechless.  Au and Ag must be $42/oz and $5/oz, respectively, again.

Ckierst1's picture

Apologies for the duplicate post - fat finger syndrome?

otto skorzeny's picture

spot on-old chap. that doesn't keep a dog like CHK from staying in the high teens

MrBoompi's picture

Are these drillers and producers a bunch of fucking idiots or what?  WTF did they think would happen when the market is flooded with natural gas?

I would say they shot themselves in the foot, but it appears they aimed a little higher up than that.



JuicedGamma's picture

One has to wonder if there are similar NG deposits worldwide waiting to be fracked with the resulting price declines. Seems the true energy crisis has been moved out many many decades.

Desert Irish's picture

Exxon have tried fracking shale deposits for NG in both China (worlds largest shale deposits) and Poland have have met with zero sucess. Exxon have since suspended all fracking in China. Poland is now going it alone.

Flakmeister's picture

Some shales are more frackable than others....

Tight NG and oil is no panacea, it's telling you that the endgame is in progress...

Mutatto's picture

"waiting to be fracked"???

Sounds like a girl I knew in college! LOL


gmrpeabody's picture

I went to that school..., and she wasn't waiting.

Manthong's picture

Thanks to the miracles of the Ponzi Bubble Burst Bubble Burst Financial Markets and the political enablers, the producers and infrastructure that we need to optimally to exploit the available energy resources will not be there when we need them the most.

The money for their operations and a stable energy  market will have been scammed away into the  basement vaults of  financial racketeers and politicians.

otto skorzeny's picture

japan will gradually bring their nukes back online. I see LNG export terminals a moot point in the US because once the enviromentalists get involved and point out to the locals that LNG tankers are just floating bombs with the power to level your friendly town its game over

philipat's picture

Why doesn't the US make use of this abundant natural clean energy source. Yes, there is infrastructure needed but that would have been a better investment than bailing out Banks. The US could heat its homes and drive its cars on LNG and become self-sufficient in energy, which would go a long way towards solving larger economic problems? The only downside I can see is that it might reduce the scope for political theatre and excuses for wars by the military industrial complex?

AGuy's picture

The Belief that NG is abundant in the US is a false belief. Fracking is not a game changer, just an distraction from the real issue.