From Glut to a Whiff of Panic: Natural Gas Soars

Wolf Richter's picture

Wolf Richter

On Friday, when stocks were plunging, natural gas soared 9.6% to $5.18 per million British thermal units (MMBtu) at the Henry Hub. Up 20% for the week. The highest close since June 2010.

Back then, the “shale gas revolution” had turned into a crazy no-holds-barred land-grab and fracking boom that veered into overproduction and a “glut” – accompanied by a historic collapse in price. The US could not export its excess production due to export restrictions and the lack of major LNG export terminals. By April 2012, when the Japanese were paying around $17 per MMBtu for LNG on the world markets, natural gas in the US hit a decade low of $1.92 per MMBtu, and predictions that it would go to zero showed up in the mainstream media. That was the bottom.

But nothing can be priced below the cost of production forever. By Friday, natural gas was up 170% from the April 2012 low. Turns out, only a low price can cure a low price.

The low price caused demand to creep up.

Gas exports via pipeline to Mexico have been growing, especially since additional pipeline capacity went into service last year. Mexico is switching power generation from using its own oil to cheap US natural gas. This allows it to export its more valuable oil to the US. Ka-ching. But building gas-fired generating capacity is a slow-moving process.

Other exports are also moving forward – in people’s heads. There are pipelines between the US and Canada, but the US is a net importer. Exports of LNG are at this point still a pipedream, so to speak, though deals are being made, contingent on getting government approvals to export LNG. It’s going to take years before LNG can be exported in large quantities.

But the low price had short-term and structural impacts. Utilities dispatched electricity generation from their coal-fired plants to their gas-fired plants. And there have been structural changes: utilities have built gas-fired power plants and have retired – not mothballed! – their oldest, most inefficient, and most polluting coal-fired power plants. Global industrial companies have been building plants in the US for energy-intensive processes and for processes that use natural gas as feed stock. Even natural gas in transportation is picking up.

The low price destroyed the business model for drillers.

Thousands of unprofitable wells litter the land. Many billions were written off. Real money that had been recklessly thrown around during the boom disappeared into the ground. Investors were lured with false promises. The bloodletting in the industry was enormous. Some of the largest drillers have pulled back from drilling for dry natural gas. Most of the wells that are still being drilled are in fields that are rich in natural-gas liquids and oil, which sell for much higher prices and make wells profitable. Dry natural gas has become a byproduct. In the immensely productive Bakken shale-oil field in North Dakota, where gas occurs along with oil, 30% of it is flared – burned at the well as a waste product. The low price doesn’t justify building pipelines to haul it off.

But shale gas wells have sharp decline rates, and new wells need to be drilled constantly to make up for the decline in older wells. These days, not enough wells are being drilled, and production in all gas plays combined – except for the Marcellus – is already in slight decline. The only production boom left is in the Marcellus: the “shale gas revolution” in the US is now a one-pony show.

In January 2012, according to Baker Hughes, there were 143 rigs drilling for natural gas in the Marcellus – the most prolific parts of which are in Pennsylvania. Today, there are 86. But during the drilling boom, someone forgot to install sufficient pipeline infrastructure. So, wells were shut in, perhaps thousands of them, a giant reservoir waiting for takeaway capacity. That was 2012. Last year, part of a new pipeline network went into service, and bottlenecks were removed, and the gas started flowing to New York City and other places. Drilling is down. Production – the delivery of gas to the markets – is soaring!  

How long can it last? Well decline rates in the Marcellus are as steep as elsewhere, and this sudden burst in production, if not supported by a new bout of drilling, will taper off as it has in other fields. And that’s today’s one-pony show of the US “shale gas revolution.”

Then cold fronts swept across the country.

These polar vortices, as they’re now referred to for additional flair, have caused demand for gas as heating fuel to spike to record highs. And more bitter cold weather is being forecast. Natural gas in underground storage dropped to 2,423 billion cubic feet (Bcf) for the week ending January 17. The last time storage levels were this low during an equivalent week was in January 2005!

At the time, gas was selling for $12 to $14 per MMBtu and hit an all-time high of $15.40 in December that year. But demand has changed. In 2013, demand was over 18% higher than in 2005; this year, it might be over 20% higher [my article from nine days ago.... Natural Gas Squeeze? “Panic hasn’t ensued just yet”]. 

And the big money has jumped into the fray.

For years, the favorite game was to short natural gas, playing the glut for all it was worth, a sport that has gotten very complex and, if you get the timing wrong by a few hours, very expensive. Some of the spike late Friday, and some of the action all week, was due to a hard squeeze on these folks – as the big money arrived en masse.

On Wednesday, the big money went public. As reported by MarketWatch, Citi analysts wrote that, “With tight fundamentals, $5 gas is not impossible.” What had been obvious for a while, showed up in the media: “Strong demand is expected to push gas inventories to very low levels with cold weather lingering.” And the price took off once again.

Now everyone is bent over weather data, trying to figure out what nastiness the winter will still serve up, and they’re betting on the weather because cold snaps happen relatively fast and are observable. Watching the fundamentals is like watching paint dry. But it’s the fundamentals that have changed the equation. The polar vortices are merely speeding up the calculus.

Natural gas is famous for its head fakes, unexpected plunges when it should rise, and inexplicable rises when it should drop. It’s being manipulated in a myriad ways. It’s always a bet on the weather, except when it’s not. It can turn around in a second and cause whiplash. It’s a seatbelt-mandatory commodity. And once every few years, there is a panic, and it spikes to dizzying highs.

While natural gas was soaring on Friday, and all week, the rest of the markets were tanking, with emerging markets “trading in full-blown panic mode.” What gives? Read....  A Teeny-Weeny Bit Of Taper, And Look What Happened

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falak pema's picture

don't be too sure of any rise being ineluctable and sustainable,  as this is a toboggan run scenario. Wild rides up n down. 

Gusher's picture

Nat gas was SUPER cheap. Now it is only CHEAP. Whats the big deal. It got cold, it stayed cold...prices went up, what do you expect? And in about 3 weeks, it will be warming up a bunch.  Nothing new here... 3 weeks folks. Can you hang on that long?

TheRideNeverEnds's picture

I've got bad news for all buyers of nat gas; I am giant short it from selling a reckless amount of calls into the spike last week so it is pretty much guaranteed to go substantially higher from now through the end of this year.

Schacht Mat's picture

An artificially low price (abetted by 1. liquid rich wells subsidizing NG price; 2. wells being developed in order to not lose the fracking leases; 3. GAAP writedown rules designed for conventional wells being applied to fracked wells with much more pronounced decay curves), has resulted in structural increased demand due to new build and fuel switching (plus a little climate change propaganda to drive coal out and have it replaced by, you guessed it – natural gas; wait until the reduced use of coal diminishes the solar dimming effect, which in turn will increase the global warming effect – anything, including environmental sabotage, to prolong the myth), which has been augmented, just to make sure the market is fully spiked, by the development of LNG, which will make sure that soon, our North American NG price will be pegged to the far east landed price less processing and transpacific transport, and what do we have – an NG market that is now ripe for the plucking.  Enter the Wall Street big boys, stage left and let the rape and pillage begin.  All that this cold winter has done is tip their hand, which may in fact be a good thing, as it may reduce the drive for some of the more capital intensive fuel switching projects before they become reality and further cement a demand market that, in 10 years, will be unable to be kept fed by the unfolding supply side.  The EIA numbers, which sound so promising, are taken from the PGC (Potential Gas Committee) of the Colorado School of Mines, and they provide numbers for proven gas, probable gas, and possible gas.  Guess what the EIA does – good guess – they add all three numbers up and then announce that as the US gas reserve number.  And you thought the BLS (bull licking shit) numbers were cooked – hah – raise you one.  And what have the big boys done – they drove the long price on NG down, bought up a crap load of it, and will now monetize those buys at a high market price.  The supply side gets ripped off, the demand side gets ripped off, and the pin stripes in the middle make a bundle on the back of the real economy.  Yeah, while we were all watching the real estate market, central bank shenadigans and climbing debt rates, these guys have found a way to play one of the remaining physical markets that people truly need to survive – energy.  Next, they will find a way to play the food market.  Don’t believe me – OK – let’s talk again in about 5 to 7 years.  When the consumer is played out and there is no more money in the general frills market (not including the luxury market targeting the .1% and better crowd here – lots of growth to be had there), the growth in the fleecing market must be made in shelter (done), energy (getting there fast) and food/water (in the works).

viator's picture

Maybe the spike is caused by the coldest weather in more than twenty years? Higher prices will mean even more gas production.

dexter_morgan's picture

what? wait - isn't climate change helping out with this? Should be using a lot less heating fuels now that things have warmed up. Or is that offset by the fuel needed to produce the electricity for the AC?

rsnoble's picture

Anything that is cheap enough is a concentration area of big $ to fuck us over. Rather or not the 'story' is true.

ManWithaPlan's picture

I am no scientist but destabilizing the Earths crust does not seem like a good idea.

williambanzai7's picture

The solution is to move south to a warm climate. Nicaragua for example. See you all there Gringos ;-)

Peter Pan's picture

Now only if they could harness the gas that congress produces the USA would be a clear leader.

laomei's picture

The best part of NG is the LNG ports being built for export.  When the rest of the world is paying $15+ and you have a supply for sub $5, what exactly do you expect to happen?  This won't make "america" rich by the way, it'll just further enrich those wonderful companies that get subsidies instead of taxes.  Ok, ok, fine, sure, maybe some people might get some decent jobs out of it.  But it's not like they will be giving you dirt cheap gas and only exporting the expensive stuff, you'll be paying a price that is high enough to not justify exporting it.

lasvegaspersona's picture

Question: how much energy is used (wasted) in making LNG?

These kinds of products have built in problems. When you waste energy there are usually alternatives that come along and ruin the investment.

Goldilocks's picture

Margaret Whiting and Johnny Mercer - Baby Its Cold Outside (3:09)

orangegeek's picture

In November 2013, a move to 4.50 was starting to unfold


By December, a move to 5.00 appeared more likely.

I Write Code's picture

Good article.

It's some kind of a joke to have domestic methane flared off.

Jack Sheet's picture

Anything traded on a futures " market" is manipulated.
The bankers are storing the gas in their asses to keep it off the market.

NoWayJose's picture

Don't worry, natural gas supplies will be 'plentiful' in May -- you know, that time of year when several refineries somehow schedule their 'routine maintenance' all at the same time, which just happens to be the same time that they can't keep up demand for summer formulated gasoline, which just happens to be the same time when a mysterious explosion happens in a Texas refinery, which just happens to be the same time as Nigerian rebels blow up a pipeline, which just happens to be the same time that Obama starts threatening yet another Middle East oil producing country, which just happens to be the same time that Israel declares a tougher new policy on terrorism or Iran, which just happens to be a month or two AFTER Goldman loads up on oil futures and dumps natural gas futures....  So don't worry, gasoline will hit $4.00 again by early summer.... and the misery will be shared with the warmer states...

kurt's picture

Add regular bullshit trumped up by Tobey Lungren.

ebworthen's picture

And people want to make cars and trucks run on natural gas.

It will cost people in cold climates $500/month to heat their home.


Jani's picture

"It will cost people in cold climates $500/month to heat their home."


Here in the NE, where many people are forced to heat with oil, that would be a tremedous savings. I use a wood burner to greatly reduce my costs, but I know some seniors that spend the bulk of their SS checks on heat in the winter, cutting back on luxuries like proper nutrition and stuff.

Cutting their heating bill to just $500 per month would be nice.

ebworthen's picture

I'm talking $500/month on an annualized basis.

People in the sticks heating their single pane glass circa 1920 homes with oil have nothing to do with natural gas.

We're talking suburbia, capiche?

Jani's picture

Can't get more suburbs than Huntington LI, NY

ebworthen's picture

O.K., fair enough, I know that heating oil is worse than diesel as far as pricing.

I'm talking about natural gas for those who heat with it, or process grain, or food, or...

cynicalskeptic's picture

Heating oil has more than quadrupled over the 20 years I've been in this house.  It's well over $4 a gallon - more than the cost of diesel (WTF!)   

The cost of heating places is definitely a factor for people - even 20 years ago whan we bought this place the old lady in it had apparently gotten oil from every place in the county (and paid none of them).

I've renovated most of the place - adding insulation, insulating all accessible distribution piping, adding all new double paned windows and vastly improving its energy efficiency and we still use 1000 gallons a year with the thermostat setting leaving the first floor 'cool'.   This is with a high efficiency burner running an old one pipe steam system.  Good sized house from the 20's that's actually much cheaper to heat than many of its neighbors - it had under roof insulation when built.

the grateful unemployed's picture

good summary, been long NG for a long and mostly painful amount of time. if NG were to become a standard in transportation (it already is used in buses, trash trucks, and so forth) i feel that it should be priced at the equivalent BTU rate, or almost twice what it is now. the nayers say the infrastructure is too difficult, (while the infrastructure for crude refining is not?) and if they can get LNG into transportation then a lot of problems would be solved. the real problem i ask you, if NG became ubiquitious is there enough in the way of reserves to justify this, (and i would say don't be afraid to assume fewer driving miles per capita, and that will be a trend when it is recognized, and the upcoming global recession should taper demand, an economic slowdown could work in NGs favor. there is also the global warming factor, a hard sell now, let's wait and see what global temperature readings are, there's a lot more to the planet than NY city)

in the meantime is NG at a short term high, or how high can it go? 

zenon's picture

Make that a triple if you price it off of crude (5.17NG * 6(Barrels per 100 cu ft)= $31.02 vs. $97 crude

Clycntct's picture

There's numbers and there's others numbers.

I had looked at cost comparisons years ago and thought I knew what it was.

 I recently looked again and found my effective cost per therm was at a gag $9.72 per.

 Now looking at elec to btu my effective cost is 2.49 per therm.

So as that info is absorbed it may vary the velocity of your trajectory of $ value.

The Joker's picture

Of course it's being manipulated.  Much funding for climate change NGOs comes from big oil, Exxon, Shell, etc.  Those NGOs pushed the EPA to regulate CO2 and essentially shut down the coal industry.  Why?  The only competition big oil has is from electric cars generated by coal.  Those same companies own the natural gas industry, Shell is a big player,, in a big game.  Now that coal is being laid to rest by the EPA, those big oil companies can reap huge profits from natural gas.

Comte d'herblay's picture

Every day that I wake up not dead, I find I know less than I did the night before.


Over a few years, I am reduced to feeling and thinking that I knew more as a one yr old,  than I do today; and with more certainty, and over a broader but simpler range. And the more information and data i gather to decide what to do the more certain am i that I KNOW!  NOTHING!!!!


Pinto Currency's picture


The multiplier for nat gas vs oil is 5.8x so at $5/tcf the energy equivalent cost of nat gas is oil at $29/bbl

The question is, given the savings, why has it taken so long for nat gas demand to increase materially?

cynicalskeptic's picture

Oil has dominated the NE because pipeline supply of NG has been limited.  ConEd discouraged conversions for years because they could barely meet demand as it was.  They added a new pipeline in the last 10 years to increase supply but they are a pain to deal with (even though they make more $$$ when they add NG custpmers).  A neighbor converted and got 'there are usage pattern issues with your account tht are being investigated' instead of being billed - well, YEAH, he was now heating his home with NG....  he finally got a bill with 8 months of NG usage on it.

duo's picture

For the rural people up North faced with $5 propane or none at all, the solution is space heaters.  It's actually cheaper at that price.

Let's hope they have the generating capacity.

the grateful unemployed's picture

in a perfect world you would access to any fuel, but at the moment the crude oil products have a monopoly. if you search natgas pumping stations in your neighborhood you will probably be shocked to learn they are all over the place, its just most of them belong to school distructs bus lines, trash collection, they're not public. i think obama has very quietly let this happen in order to give public transport a break, the infrastructure is there. in a highly urbanized culture ng makes a lot of sense.