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The Natural Gas Massacre And Price Spikes
Wolf Richter www.testosteronepit.com
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.
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Sounds nice, but...
Is the US currently a net importer or exporter of NG?
By the way, I don;t think too many vehicles are running off of LNG.... CNG, LPG maybe, but not LNG...
Because it makes good sense.
i was always wondering ... if you hijacked one of those LNG tankers, and you managed to place a bomb or bombs in the right places around the actual LNG tanks so as to disperse the LNG in the air optimally before ignition, wouldn't it make like a gigantic fuel-air bomb?
An LNG tanker used as a trigger to set off an LNG terminal would result in a detonation of nuclear proportions.
These non-sequitor comments used to be way down the page.
That idiocy pales in comparison to a key premise of the author of this article: Oversupply can’t be corrected by exporting; it causes prices to plunge.
Please review some facts and get back to us. No, really.
Counterintuitive? He needs to take the 5 minute university course.
http://www.youtube.com/watch?v=kO8x8eoU3L4
I assume you speak metaphorically ;-?
There was an ugly LNG explosion in New England during WW2. Can't remember the specific town or date but it killed hundreds and injured thousands. So yeah, it can make a hell of an explosion.
Cleveland, 1944 http://en.wikipedia.org/wiki/Cleveland_East_Ohio_Gas_Explosion
44th on the wiki list of explosions...
http://en.wikipedia.org/wiki/List_of_accidents_and_disasters_by_death_toll
i was always wondering ... if you hijacked one of those nuclear power plants, and you managed to place a bomb or bombs in the right places around the corium so as to disperse the plutonium in the air optimally before ignition, wouldn't it make like a gigantic dirty nuclear bomb?
The containment building can withstand a 767 plane hitting simultaneously with a couple of tornados. Additionaly, when the negative pressure inside the building turns normal, an automatic shut down is triggered.
Before that, you need to bypass very tight security with IR and MW detection and cameras along all double fences. All cars going in and out are searched.
Flying in with gliders will only give you a few minutes.
So NO!
Actually that was a direct riff on a post above. Suppose the 767 was loaded with jet fuel?
what if you just ran a liquified natural gas tanker into a reactor that was near the ocean or a big inlet. could that do it?
let's keep going with absurd talk.
+1 for corium. pretty much anything nuclear related should have the suffix "ium" added to it.
fukushimium for a start.
one or two anti tank missiles doe the job
Reactor in absence of proper cooling would probably melt down, boring: Fuukushima #2. Conversely, let's take mental experiment just a notch higher in terms of insanity and replace proverbial 767 with a small nuke device, say of a suitcase format. The question is: given the yield of 1 kiloton for the initiating device, what would be total yield together with all that in the active zone of the reactor. Hold on, I think someone just knocked on my door, wait a sec~
Perhaps that is true. One mitigating factor, however, is that unlike propane, methane is lighter than air and will gradually rise as it disperses. Natural gas is primarily methane (70% to 90%). LNG is typically 95% methane.
Not sure how that would play out in the scenario you laid out. ie. how long it would take to thaw & convert to gas etc., but supposedly CNG vehicles are somewhat less dangerous in that regard than gasoline, which of course pools on the ground in its liquid state.
i for one would like to see the u.s. military do a test of what a fully loaded tanker would do if exploded at sea, just so they would know if it is safe to roll these bad boys out in full force across the oceans.
oh, pay-per-view ...and 100,000,000 hits on youtube.
and they could auction off the rights to light the fuse.
Or maybe fire a mortar or two at it first.
Or ride in a submarine and push the button to fire the torpedo.
Do you guys remember Buffet and his stooge saying that NG is going to zero? guess what; as soon as I heard that I bought several calls August dated and made a little change. Buffet, Godman advice? Go the other direction and you're good 9 out of 10 times.
yeah-pretty much- think along the lines of the last scene in "Syrianna"