Natural Gas Price Could Soar as Number of Idle Rigs Grows
Natural Gas Price Could Soar as Number of Idle Rigs Grows
by: Money Morning March 17, 2009By Jason Simpkins
After an unparalleled fall, natural gas prices could double by next year, as a growing number of idle rigs create a supply crunch.
Natural gas prices have tumbled by about 30% this year, as a steep drop in industrial consumption has undermined demand. However, many of the traders and hedge funds that placed speculative bets on the price decline are beginning to reverse course and bet on a price spike, as dwindling production is starting to outpace slumping demand.
Traders trimmed their net short positions on gas by 11% to 114,064 in the week ended March 10, the smallest since last July, Bloomberg News reported. Also, natural gas futures for delivery in January 2010 are trading at a 49% premium to the April contract, which means speculators are anticipating a price surge.
In its short-term energy outlook - released on March 10 - the Energy Information Administration said that total natural gas consumption is projected to decline by 1.3% in 2009 and then increase by 0.4% in 2010. But many energy companies have idled rigs, scaling down production and increasing the chances of a supply crunch if the economy starts to recover.
Just as natural gas prices have plunged below $3.90 per million British thermal units (btu) from a record-high $13.694/btu on July 2, the number of natural gas exploration rigs in the United States has fallen to 884 from a record 1,606 in September, according to Baker Hughes Inc.
U.S. natural gas rigs fell 15% to an average 1,037 in February, their fifth consecutive monthly drop, Baker Hughes said.
With so many rigs coming offline, fourth-quarter gas production could decrease by 5.2%, Bloomberg reported. That would outpace the relatively acute decline in natural gas demand forecast by the Energy Department.
“When the recession ends and the economy starts booming, we’re going to have less natural gas than we do today and prices are going to spike back up,” said #HYPERLINK "http://www.reuters.com/finance/stocks/officerProfile?symbol=DVN.N&officerId=195686"Larry Nichols, chief executive officer of Devon Energy Corp. (#HYPERLINK "http://seekingalpha.com/symbol/dvn"DVN). “The drop in supply will be so steep, it could easily catch up to where demand has dropped to before the recession ends.”
It’s also likely that more exploration projects will be shelved, and more rigs idled, as economic turbulence continues to linger. The cost of drilling and servicing is double what it was just four years ago, and in that time credit standards have tightened and the cost of borrowing money has increased substantially.
“When everybody sobers up after the first quarter and sees what their real cash flow is going to be, people are going to be very discouraged about how much capital they have to spend and that will depress the rig count even further,” G. Steven Farris, chairman and chief executive of the energy company Apache Corp. (#HYPERLINK "http://seekingalpha.com/symbol/apa"APA), told The New York Times.
Theresa Gusman, head of equity research for Deutsche Bank AG’s DB Advisors unit, told Bloomberg that spending on U.S. exploration and production will drop an estimated 40% to $22.5 billion this year.
Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania is among the analysts who believe natural gas will soar back above $7/btu in the next 12 months.
“The next big move for gas is obviously going to be up,” said Schork. “If we are higher, I’d expect to see us at $7 by the start of next winter.”
by: Money Morning March 17, 2009By Jason Simpkins
After an unparalleled fall, natural gas prices could double by next year, as a growing number of idle rigs create a supply crunch.
Natural gas prices have tumbled by about 30% this year, as a steep drop in industrial consumption has undermined demand. However, many of the traders and hedge funds that placed speculative bets on the price decline are beginning to reverse course and bet on a price spike, as dwindling production is starting to outpace slumping demand.
Traders trimmed their net short positions on gas by 11% to 114,064 in the week ended March 10, the smallest since last July, Bloomberg News reported. Also, natural gas futures for delivery in January 2010 are trading at a 49% premium to the April contract, which means speculators are anticipating a price surge.
In its short-term energy outlook - released on March 10 - the Energy Information Administration said that total natural gas consumption is projected to decline by 1.3% in 2009 and then increase by 0.4% in 2010. But many energy companies have idled rigs, scaling down production and increasing the chances of a supply crunch if the economy starts to recover.
Just as natural gas prices have plunged below $3.90 per million British thermal units (btu) from a record-high $13.694/btu on July 2, the number of natural gas exploration rigs in the United States has fallen to 884 from a record 1,606 in September, according to Baker Hughes Inc.
U.S. natural gas rigs fell 15% to an average 1,037 in February, their fifth consecutive monthly drop, Baker Hughes said.
With so many rigs coming offline, fourth-quarter gas production could decrease by 5.2%, Bloomberg reported. That would outpace the relatively acute decline in natural gas demand forecast by the Energy Department.
“When the recession ends and the economy starts booming, we’re going to have less natural gas than we do today and prices are going to spike back up,” said #HYPERLINK "http://www.reuters.com/finance/stocks/officerProfile?symbol=DVN.N&officerId=195686"Larry Nichols, chief executive officer of Devon Energy Corp. (#HYPERLINK "http://seekingalpha.com/symbol/dvn"DVN). “The drop in supply will be so steep, it could easily catch up to where demand has dropped to before the recession ends.”
It’s also likely that more exploration projects will be shelved, and more rigs idled, as economic turbulence continues to linger. The cost of drilling and servicing is double what it was just four years ago, and in that time credit standards have tightened and the cost of borrowing money has increased substantially.
“When everybody sobers up after the first quarter and sees what their real cash flow is going to be, people are going to be very discouraged about how much capital they have to spend and that will depress the rig count even further,” G. Steven Farris, chairman and chief executive of the energy company Apache Corp. (#HYPERLINK "http://seekingalpha.com/symbol/apa"APA), told The New York Times.
Theresa Gusman, head of equity research for Deutsche Bank AG’s DB Advisors unit, told Bloomberg that spending on U.S. exploration and production will drop an estimated 40% to $22.5 billion this year.
Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania is among the analysts who believe natural gas will soar back above $7/btu in the next 12 months.
“The next big move for gas is obviously going to be up,” said Schork. “If we are higher, I’d expect to see us at $7 by the start of next winter.”
Views: 83
Replies to This Discussion
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Permalink Reply by w.r. frank on
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Hey Subsequent Posters,
Don't shoot the messenger!! I will be delighted with $6.84 4Q and $7.50 2010. Who says I am agin anything. I merely posted an article on a discussion of NG prices. Agree with it or not, but to be informed you need to hear the bulls and the bears.
Just for Jay's sake, the next paragaph DID NOT agree with the 20 analysts, so I will take the liberty of cutting and pasting the primary interviewee mentioned in the article:
"But Cambridge takes the view that there has been so much development of new sources of gas that the decline rate in production will be less than before. This means, the study says, "that a smaller quantity of new production is required to offset natural production declines."
As a result, Cambridge forecasts natural gas production capacity in North America to rise to 80.2 billion cubic feet a day by 2018, up 16 percent from 69.3 billion cubic feet last year.
Cambridge expects the oversupply in North America to ripple around the world, as the United States needs less imported gas, in the form of liquefied natural gas.
Even as world LNG capacity has nearly doubled since 2000, the report said, the lack of U.S. demand has the potential to keep down prices and affect the viability of LNG projects worldwide."
I certainly don't know what NG prices will be in 2010, but I read and try to stay informed of what others think. I am not "agin" $14 NG. I am not buying anything, nor am I making erroneous posts about rig counts, well permits or gas prices. If fact, nothing about future NG prices in 2010 can be erroneous now. If it is a prediction, it could turn out to be wrong.
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Permalink Reply by w.r. frank on
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On the subject of NG prices, here is a link where you can download the March 13, 2009 study by Credit Suisse on NG prices for 2009, 2010 and long-term ($8 mmbtu). I commend it to you as well done with lots of data, including LNG and its impact in 2009. Interesting is CS' opinion that breakeven (including a 10% IRR) in the HA. Shale is $3.26/mmbtu--the lowest in the US. Although CS is lowering its estimates for pricing, it still has NG at $7/mmbtu in Q4 2010.
http://www.sendspace.com/file/77asq8
Here is an excerpt:
Prices Not Sustainable Longer Term
■
Reduce U.S. Natural Gas Outlook: Along with the Credit Suisse Global
Energy team’s reduction in oil price forecasts today (see Oil Market Reboot:
“The Three Step Program” and Exhibit 2), we are also lowering our
2009/2010 and long-term NYMEX (Henry Hub) natural gas price outlook.
Our 2009 outlook is being reduced from $6.50 per MMBtu to $4.84 (Q1’09A:
$4.86, Q2’09: $4.75, Q3’09: $4.50, Q4’09: $5.25). The 2010 outlook is
reduced from $8.00 per MMBtu to $6.50 (Q1’10: $6.00, Q2’10: $6.25, Q3’10:
$6.75, Q4’10: $7.00). More importantly, we are making only a modest
adjustment to the long-term price, which is lowered to $8.00 per MMBtu from
$8.50. We remain constructive on long-term gas markets and would note
that we are not in the $6.00 per MMBtu long-term gas price camp (espoused
by many recently) as we don’t see sufficient cash flow and returns to
balance the market at prices in that range.
■
Look For Near-term Price Weakness on Current Glut: On a short-term
basis, weak demand trends, expected near-term rises in LNG and still
growing supply are resulting in a substantial gas market imbalance currently
(~5 Bcf/d). The worst of the imbalance is likely to last through the 2009 refill
season at the end of October, with weak cash prices and shut-ins expected
this summer. Storage refills are likely to be limited to an effective maximum
capacity of ~3.85 Tcf thus constraining refills. Meanwhile, limits to storage
builds could act as a positive later in the year as production begins to fall.
■
Market Tightening Expected in 2010: We see prices improving by Q2/Q3
2010 even without a demand improvement, as markets begin to reach
greater balance due to sharp onshore supply declines. In fact, we see peak
(November’08) to trough (Q4’10) onshore supply declines of ~7 Bcf/d (down
~13%) based on our revised trough natural gas rig count assumption of 690
(down from 950). We also note that we think that late-year 2010 prices have
an upward bias on any economic improvement given the expected supply
shortfall.
Reduce Long-Term Gas Price to $8.00 from $8.50 on Improved Extraction
Efficiency: We are making a modest downward change to our long-term natural gas
price outlook to $8.00 per MMBtu from $8.50, which reflects a combination of lower oil
price assumption (which makes imported LNG a bit cheaper) and evidence of
improvements in extraction costs for unconventional gas. Clearly, the combination of
rising land purchases, high service costs and price related revisions drove U.S. F&D to
sky-high levels in 2008 (we estimate $3.50-3.75 per Mcfe), which would make it seem
that break-even costs are rising. However, the true cost of extraction has improved as
producers are achieving better reserves per well amid great progress on the
completion approach to unconventional reservoirs. Also, service costs are likely to
stabilize at lower levels. Likewise, we think a longer-term F&D cost will be in the $2.75
to $3.00 per Mcfe range, which will necessitate an $8.00 per MMBtu type price (for a
10% return) when considering cash costs and time value.
Exhibit 1: Credit Suisse NYMEX Natural Gas Price Outlook
($ per MMBtu)
Current Previous
Period Price Price Futures First Call
Q1'09 (A) $4.86
Q2'09 $4.75 $6.50 $3.94 $5.66
Q3'09 $4.50 $6.50 $4.27 $6.04
Q4'09 $5.25 $6.75 $4.96 $7.00
FY'09 $4.84 $6.50 $4.51 $6.33
Q1'10 $6.00 $8.00 $5.72
Q2'10 $6.25 $8.00 $5.45
Q3'10 $6.75 $8.00 $5.69
Q4'10 $7.00 $8.00 $6.17
FY'10 $6.50 $8.00 $5.76 $7.50
Long-Term $8.00 $8.50
Credit Suisse NYMEX Natural Gas Price Outlook
Christopher Hoffman
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Permalink Reply by w.r. frank on
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I do too! It is the most data driven assessment that I have discovered. The analysis of supply/demand broken down by onshore, Canada, LNG and power, industrial,etc. is excellent.
The $7/mmbtu Q4 2010 projection is without any demand improvement, which means there is genuine upside potential in the out quarters.
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Permalink Reply by Anna Mauck-Member Services on
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Two LA lawmakers are trying to increase the demand. From today's Shv. Times:
Lawmakers pushing LNG use in vehicles
BATON ROUGE — Sen. Nick Gautreaux, D-Meaux, and Rep. Jane Smith, R-Bossier City, sometimes don't agree on politics but they do agree on promoting the use of something that's plentiful in their regions — natural gas. The two lawmakers from opposite ends of the state are pushing legislation that they say will stimulate the economy while improving the environment by utilizing compressed natural gas to power automobiles.
The bills, expected to be pre-filed later this week for the legislative session that begins April 27, offer tax credits for drivers who convert their existing gasoline-powered vehicles to run on CNG or purchase new vehicles already equipped. Also, credits are offered to filling stations that install the necessary equipment to fuel the vehicles.
"We have the opportunity in the state of Louisiana to be a national leader in this," Smith said. "We have something that's abundant, it's clean and it's American." Smith said the Haynesville Shale in northwest Louisiana contains enough natural gas to power vehicles for decades.
"I've been told that if a cubic foot of natural gas is the size of a basketball, in the Haynesville Shale there are 250 trillion basketballs," she said. "We're sitting here on the supply, but we lack the demand."...
http://www.shreveporttimes.com/article/20090325/NEWS01/903250335/1060 - Attachments:
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Permalink Reply by Laman_71106 on
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Yea! I likes me sum o' those long stripped wawtah mellons! Don't know about 250 trillion of em. Lotsa seeds to spit.
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Permalink Reply by Dion Warr, CPL on -
Jim:
Perhaps a good visual for folks would be about two million Superdomes worth of natural gas recoverable, or roughly 35,000 Superdomes charged to standard line pressure?
Largest production values cited from single HA wells to date show a single such well would fill the interior space of the Superdome to ambient pressure in approximately five days (perhaps as little as four and one-half days, depending on choke aperture and initial decline).
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Permalink Reply by w.r. frank on
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Here is a link to a lengthy interview with Michael Hall, analyst with Stifel Nicolaus. It covers NG supply/demand and pricing, plus CHK and HK and his views on cyclicality and seasonality.
http://www.commodityonline.com/news/Where-is-Crude-Oil-price-going-...
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