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Five Reasons NatGas Prices Have Stabilized

Tyler Durden's picture




 

While the infamous 'Gundlach' trade has done remarkably well since inception, our view on NatGas has become less vociferously bullish recently as the more constructive factors such as an under-appreciation of declining production and rising utility demand. While their remains upside potential to gas prices over the next 18 to 24 months, we tend to agree with Credit Suisse as they note five reasons why a near-term pause in pricing is likely. With unconventional supply more resilient than many had expected - covering the fall in conventional supply and absent an extremely cold winter (which NOAA is not expecting), a range-bound NatGas pricing market seems the new normal (for now).

 

Via Credit Suisse: Five Reasons Why A Near-Term Pause In Pricing Is Likely

 (1) Haynesville (HV) production is higher than expected.


 

We estimate the break-even cost of gas is $3.77/Mcf in the Haynesville core and $4.93/Mcf outside of the core. As a result, HV drilling activity in the core has declined, averaging 19 rigs in Q312 versus the peak of 138 rigs in Q210. Given the decline in drilling activity, our proprietary production model estimated that July HV production was 5.9 Bcf/d, but State data indicates that actual production is 7.1 Bcf/d, or 20% above our estimate.

 

o HV volumes could be flat or higher in Q3. On October 2, Plains (PXP) preannounced 6.4% higher production relative to guidance. The biggest surprise was the implied sequential increase in natural gas given reduced activity in the Haynesville. It appears the company’s US gas volumes surged 7.5% sequentially to roughly 250 MMcf/d. PXP owns a 20% non-operated interest in Chesapeake’s HV acreage, who is the largest producer in the play.

 

o Why was HV production so resilient? HV activity has been more resilient given (1) higher than expected completion activity in the 1H12 as operators have worked through completion backlogs, (2) impacts from restricted rate programs, and (3) significant production shut-ins from CHK. In February, CHK began to shut-in volumes in response to low gas prices, peaking at more than 650 MMcf/d of shut-in HV volumes in Q212. We believe CHK resumed production from the wells in late Q2, which is boosting the nearterm HV production outlook.

 

(2) Drilling efficiencies mitigating lower gas activity.


 

On a year-over-year basis, the natural gas rig count has declined by 54%, yet production is yet to crack. One of the key factors why production has been so stubborn is the impact of drilling efficiencies. In the Barnett Shale, the industry has averaged 2.70 completions per month, which represents a 17% improvement in efficiencies relative to 2011. This is an astonishing 29% improvement relative to 2010, when the industry completed 2.1 monthly Barnett wells per rig. The same trends are evident in other key dry gas basins.

 

(3) Marcellus debottlenecking in 4Q should bring untapped supply to market:

 

 

The Tennessee Gas Pipeline (TGP) Northeast Supply Diversification and National Fuels Northern Access pipelines are expected to add 500 MMcf/d of takeaway capacity to the northeast market by November 1. TGP Northeast Supply Diversification will supply the New England market with 100 MMcf/d and an additional 150 MMcf/d into Canada via Niagara. National Fuel’s Northern Access project will extend from their TGP interconnect in Ellisburg, PA to the TransCanada Pipeline at Niagara, bringing 320 MMcf/d of supply with it. The key to these projects include the fact that they bypass the fully subscribed TGP 300 leg and are in close proximity to the estimated 1,000 drilled, but uncompleted wells in Pennsylvania.

 

(4) Widespread ethane rejecting is boosting gas supply by approximately 300 MMcf/d.

 

 

As a result of weak processing spreads (Mt. Belvieu frac spreads are only 10¢/gal), processors are rejecting ethane in several markets such as the Rockies, Mid-Continent, and San Juan Basin. Envantage estimates the industry is rejecting between 100 and 125 MBopd of ethane across the U.S. It appears that ethane rejection is boosting natural gas supply by approximately 275 to 350 MMcf/d.

 

(5) Switching Economics no Longer Universally Favor Gas:

 

 

Electric utility demand in 2012 has been off the charts, averaging 5.7 Bcf/d, or 29% above 2011 levels. Using historical correlations between coal generation market share and gas prices, we estimate the potential impacts to switching at different price points in the 1H13. We estimate natural gas could lose 2.4 to 5.1 Bcf/d of market share to coal at gas prices between $3.50 and $4.50 per Mcf. At the current futures strip of $3.95 per Mcf, we estimate gas could lose 3.75 Bcf/d of market share to coal in 2013.Focus shifts to key fundamental of gas market—winter weather. The largest risk to our outlook for the remainder of 2012 and into 2013 remains weather. As the 2011-2012 winter season proved, a warm winter in a market flush with supply of natural gas can significantly move prices lower. The same goes for a cold winter as well. We estimate that a one standard deviation event in winter weather can drive a 235 bcf swing to either side in season ending inventories compared to an only 100 bcf impact in the summer. As such, we approach the winter season with a heightened level of caution and fully appreciate the

 

and meanwhile, NOAA favors a warmer-than-normal West and gives equal chances to either side for the East. Shown below, warmer-than-normal temperatures are currently expected from TX toward the Pacific Norwest with the warmest temperatures coming at the Northern Rockies.

 

A drier-than-average winter is expected for the Pacific Northwest and Northern California, possibly leaving hydro output lower and gas burn higher in the West. Given uncertainty with El Niño and NOA, the NOAA gives equal chances for temperatures for much of the Midwest and Northeast.

 

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Wed, 10/24/2012 - 12:51 | 2916011 DoChenRollingBearing
DoChenRollingBearing's picture

PERU, fer chrissakes, has changed over a large part of its Lima taxi fleet to NatGas.  And Peruvians (private citizens) are poor, yet THEY made the change themselves.  Why?  Bercause it's cheaper...  I believe that they did that more-or-less on their own without much .gov help (I should look into that though).

If Peru can do that, why can't we?  There is a lot of low hanging fruit (all taxis, municipal vehicles, trucks using the Interstates, etc.) that we could, well, nudge into using NatGas.  It's a matter of will.  Yes, there are infrastructure costs, but Peru did it...  We have so much NatGas, it's almost a crime that we are not using this gift.

Wed, 10/24/2012 - 13:01 | 2916045 irie1029
irie1029's picture

Loves truck stops across the US are putting in CNG first one is on I40 in OKC.

Wed, 10/24/2012 - 14:13 | 2916235 DoChenRollingBearing
DoChenRollingBearing's picture

+ 1

That is an excellent piece of news, good reporting!  Soon, it looks like we will have a demonstration to see if CNG will work out.  Yes, I know it will take some time.  But, Cummins is coming out with (maybe already out with?) a truck engine to run on gas.

If you hear more, irie1029, let us know!

Wed, 10/24/2012 - 14:23 | 2916273 kaiserhoff
kaiserhoff's picture

No reason why it shouldn't work.  Propane is a by-product of oil refining, but functionally the same as compressed nat gas.  Those engines have worked great in the Midwest and Midsouth for 50 years that I know of, probably longer.

Wed, 10/24/2012 - 14:46 | 2916333 Flakmeister
Flakmeister's picture

Propane is not primarily a byproduct of refining.... It is a major component of NGL which is separated at  a NG wellhead....

As far as enegy density goes

Propane  46.44 MJ/Kg OR    25.3 MJ/L

CNG        53.6            OR     9 MJ/L    (@3600 psi)

So there is a huge difference between them...

Wed, 10/24/2012 - 14:46 | 2916348 kaiserhoff
kaiserhoff's picture

Tell yo momma yo ass needs a whoopin'.

http://en.wikipedia.org/wiki/Propane

 

Wed, 10/24/2012 - 14:49 | 2916363 Flakmeister
Flakmeister's picture

Do you have a reading comprehension problem?

Propane is not *primarily* from oil refining.....

 

Wed, 10/24/2012 - 14:54 | 2916376 kaiserhoff
kaiserhoff's picture

One of the odd perversions of the net is that it allows spoiled children to imitate adults..., for a time.

Wed, 10/24/2012 - 15:00 | 2916399 Flakmeister
Flakmeister's picture

Yes, you seem to have gotten away with it for longer than anyone has a right to...

Now given the factor of ~3 difference in energy density (on a volumetric basis) between propane and CNG will you continue to claim they are basically equivalent?

Wed, 10/24/2012 - 15:04 | 2916406 kaiserhoff
kaiserhoff's picture

So, when did you ever have a real job?

 

Tylers, would you please consider a children's table, for those who only engage in food fights, and whose testicles may yet descend?

Wed, 10/24/2012 - 15:07 | 2916419 Flakmeister
Flakmeister's picture

My, oh, my...

Some people's children....

Wed, 10/24/2012 - 15:11 | 2916433 kaiserhoff
kaiserhoff's picture

The answer seems to be... NEVER.

Wed, 10/24/2012 - 15:05 | 2916414 Matt
Matt's picture

Says the one tossing around "yo momma" ... 

Wed, 10/24/2012 - 14:46 | 2916346 KingTut
KingTut's picture

Whoa dude.

Propane comes partly from oil refining and partly from natural gas.  There is a TINY amount of natural propane comapred to methane the dominant component of NG.  IC engines can be tuned to work on almost anything.  Diesel engines can run on anything from canola oil to natural gas.  Even so there are a fair number of cars running on LPG (propane), it just doesn't scale whereas NG does.

Wed, 10/24/2012 - 14:40 | 2916328 Don Smith
Don Smith's picture

I'm part of an investment group trying to bring CNG to the PacNW.  Portland first.  Very high interest from local government and fleets.  $2 per GGE is compelling, versus $4 a gallon for gasoline.

Just need to find the right seed capital partners.

We're trying to do it without government subsidies.  Right now, it's economic enough to do it, but the political will is behind solar (Solyndra! Yay!) and electric cars.

Wed, 10/24/2012 - 14:53 | 2916375 DoChenRollingBearing
DoChenRollingBearing's picture

gmail me at my name if you would like, Don.  Two of our employees in Peru have CNG cars, because in the end they are cheaper!  Maybe we could arrange a Peru to USA technology transfer, LOL!

Wed, 10/24/2012 - 15:14 | 2916451 Matt
Matt's picture

How does the economics of natural gas fleets work at $8 / MMcf, the price many estimate is closer to the true, full-life break-even for fracking?

Also, with electric, you can produce the electricity from natural gas, or coal, or nuclear, or solar, etc. Yes, there is loss, but from an end-user point of view, wouldn't it make more sense to use a universal form of energy storage, so you can isolate yourself (somewhat) from the price fluctuations in any one particular energy source?

Or, do you have a means of locking in the $2 GGE for a long ways into the future? What is the average service life for fleet vehicles?

Wed, 10/24/2012 - 18:41 | 2917037 Fedaykinx
Fedaykinx's picture

$8 breakeven is not a realistic number, there are at least a couple of decades worth that can be developed for half of that or less.  furthermore it will be years before we see sustained prices over 5, much less 8.

Wed, 10/24/2012 - 13:06 | 2916051 Paul Bogdanich
Paul Bogdanich's picture

According to his own weather map most of the populated parts of the nation are even chance for a cold Winter.  The Rockies and the Eastern plains are projected materially warmer and if warmer also means wetter than normal then I am sure the 12,000,000 inhabitants of the region will be happy about that.  As to the other 288,000,000 of us the chances are at least even of a cold Winter.  So in conclusion this is just some guy blathering his book.     

Wed, 10/24/2012 - 14:48 | 2916355 Flakmeister
Flakmeister's picture

The forcasted El Nino has not materiallized, moreover, the Arctic Oscillation, which drives the temperature, is a complete crapshoot, more so now that the dynamics related to polar ice are are in uncharted territory... 

Wed, 10/24/2012 - 13:14 | 2916076 Hindsight2020
Hindsight2020's picture

Why would we use what we have when other countries will just hand over million barrels of oil for just a few out of date fighter jets?  As much as I don't agree with much that is going on in the United States sometimes you have to give these guys credit for creating this paper bubble after Nixon closed the gold window.  Not saying it is great for the economy in the long run either but if I gave you a printing press that could mint 100s tell me you wouldn't try to buy some commodities with it.

Wed, 10/24/2012 - 13:38 | 2916146 buchesky
buchesky's picture

Tyler--you're "less bullish" now?  You and your buds at Goldman said just a couple of weeks ago it was time to take profits!  http://www.zerohedge.com/news/2012-10-12/goldman-closes-nat-gas-long-say...

Wed, 10/24/2012 - 17:22 | 2916838 Muppet of the U...
Muppet of the Universe's picture

I've gotta admit that ZH, CS, and GS are correct.  For a long time now supply produciton has been increasing, and even still is expected to increase.  & it is likely our winters will be shorter, and less severe.  Say thankyou to the sun.  Even still, with all the massive increases in production, the reduction in cost to drill, the reduction in field costs, the expected increases in supply, and the decrease in general demand as widespread deflation continues:  the momentum swing upward has been offsetting REALITY.  I think it is clear, as we can see in an given macd, the momentum is stopping, and the realities mentioned above are going to take hold over the winter.  As a trader who constantly recommended a long nat gas at 2.6-2.8, I think I have a fair grounding when I say that Goldman's expectation of a pullback, however severe, is a large potential possibility.  Considering that I much more greatly enjoy shorting items, considering the extremely marginal, although still noteworthy, risk probability of flash crashes...  I would advocate that traders be wary of a pullback from such a substantial and fast gain like that of Nat Gas's.  Tyler is... one of the best things to ever happen to my life. & I am greatful for every chance I get to read their material.  Thank you for article.

 

& concerning goldman:

Goldman does not lie.  Usually they do.  Either that, or they are retarded.

This is not a retard move.  It is a brilliant move.  I am already short Nat Gas.

EVERYONE, and I mean EVERYONE, probably even their clients, are starting to think they can just take the exact opposite bet of Goldman, and make money.

Goldman is setting you up.  They are pulling the OLDEST trick in the book.  there is no greater fool theory going on here, just 101 basics.  Getting muppets to buy the top, panic, sell, and short in desperation.  Perfect set up.  Perfect execution.  Well played GS.  Well played.

Wed, 10/24/2012 - 13:51 | 2916177 ParkAveFlasher
ParkAveFlasher's picture

There is only one thing you can buy with unlimited printing power without being certifiable, and that's pussy.  Everything else is the decision of a congenital half-wit.

Wed, 10/24/2012 - 14:20 | 2916262 kaiserhoff
kaiserhoff's picture

Bourbon and red wine work for me, with plenty pussy as a by-product.

Wed, 10/24/2012 - 18:44 | 2917053 Fedaykinx
Fedaykinx's picture

chk is going in with flying j on something like 100-150 LNG refueling locations along trucking corridors, it's coming along slowly but it's coming.

more and more municipalities around here are going to CNG especially for public utility vehicles and public transport.  sitting in traffic behind a CNG bus or garbage truck is certainly far less unpleasant than diesel.

Wed, 10/24/2012 - 12:52 | 2916018 TeamDepends
TeamDepends's picture

So much natural gas emitted during the debates.  Can't some genius tap into that?

Wed, 10/24/2012 - 13:22 | 2916097 slackrabbit
slackrabbit's picture

lol Dude that stuff way too toxic.

Even watching it expelled can make you sick ;-)

Wed, 10/24/2012 - 12:54 | 2916024 fonzannoon
fonzannoon's picture

Gartman just trashed gold bigtime and said the gold bugs will laugh at him for proclaiming the bottom must be in. i have to give him credit for being half right.

Wed, 10/24/2012 - 18:32 | 2917016 TheCanadianAustrian
TheCanadianAustrian's picture

When you take every position possible, it's easy to be right about lots of stuff.

Wed, 10/24/2012 - 13:07 | 2916058 kralizec
kralizec's picture

NOAA.  Right.  Using those "climate change" models?  LOL!!!

Wed, 10/24/2012 - 13:18 | 2916078 slackrabbit
slackrabbit's picture

I am in for the lllooonnnggg haaauulll, because as oil prices go up; alternatives will begin to look up.

 

In any case, miners are so volatile, the natgas etf just looks sweet. What is not to love about the graph of LON:NGAS?

Anyway, watch this one closely and judge for yourselves....    

http://youtu.be/UtKADQnjQmc  

 

:-)

 

Slack

 

 

Wed, 10/24/2012 - 14:11 | 2916226 firstdivision
firstdivision's picture

Looking at the rigs/price ratio, we are either a)over-priced or b)under-producing/exploring

Wed, 10/24/2012 - 14:41 | 2916331 KingTut
KingTut's picture

BY FAR, the most important driver of NG prices is that 1000 cu ft (mcf) has the same amount of energy as 9+ gallons fo gasoline.  Wholesale mcf is $3.50 whereas 9 gallons of gas costs $23.00 (wholesale), a factor of 6.6.

In other words, it's ABSURDLY underpriced on a pure value basis.  BTW, this is a US phenomenon, LNG can go for as high as $20 in some places.  What keeps its price low is a variety os structural factors.  Shale gas well were drilled by the thousands, and flooded the US market dropping the price to stupid levels.  However, shale gas wells need $7/mcf to breakeven.  So drilling has fallen off a cliff, as shown by the rig count.  At the same time the low prices have increased demand across a variety of sectors.  Just one example: NG is used to make ammonia which is used to make ammonium nitrate, a key fertilzer.

Decreasing supply, increasing demand, absurd underprincing ....

 

Wed, 10/24/2012 - 14:45 | 2916339 Flakmeister
Flakmeister's picture

Global LNG is comparable to oil in price on a BTU basis...

The dry gas producers are burning cash, those fortunate enough to have some associated NGL production are doing ok....

Wed, 10/24/2012 - 21:13 | 2917353 Fedaykinx
Fedaykinx's picture

you were close on the gasoline gallon equivalent per mcf (it's actually about 8) but way off on your breakeven number.  not as badly as the other poster but still way off, especially when it comes to the core areas of plays like the haynvesville, which are still very, very large and as of yet barely HBP'd.  there are thousands and thousands of wells waiting to be drilled with a breakeven number of $4 or less.

Wed, 10/24/2012 - 16:18 | 2916651 Qualitative Tig...
Qualitative Tightening's picture

Tyler, do you really trust NOAA to make such a broad weather forecast when they can't even get next weeks weather right? Who does NOAA consult anyway, the Farmers Almanac?

Wed, 10/24/2012 - 19:44 | 2917177 401-Kulak
401-Kulak's picture

Keep in mind that NG is the principal feedstock for plastics and fertilizers.  There are new plants on the drawing boards to exploit these new gas sources. Demand will increase as the price of these products come down.

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