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.”
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Replies to This Discussion
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Permalink Reply by Sarah on
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Oh my gosh...that report is 72 pages long! My computer won't scroll down for some reason. I tried clicking on the pages but can't do that either. Yes, please get back to us on this Les. I want to hear your assessment of it. WR Frank, thanks so much for sharing.
ps. Parker are you following all this? I'm actually getting it! Thanks for posting the article. :)
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Permalink Reply by sesport on
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Sarah - I'd accumulated so many good documents I had to get a jump drive to store it on just to get it off my computer. If this keeps up, I may have to resort to external HD. But I don't want to give up anything just yet. Even some of the older "stuff" has been helpful from time to time.
And I, too, hope to hear back from Les & WR soon. I'm going to ask that they make it a discussion topic, please. I'm sure I'll have plenty of ???????????????????
Best - sesport :0)
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Permalink Reply by w.r. frank on
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Nasty, nasty protectionism!! But, if the states do not get severance, why not an "equalization" tax with revenues to be shared with states in proportion to gas revunue and severance tax %.
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Permalink Reply by w.r. frank on
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If you drink the CHK "cool aid", prices will reverse in Q4 09 or 1Q 10. IMO, the only wild card in that is LNG, but I believe it is only a summer problem because Asia & Europe will soak up capacity in winter.. Asia under long term contracts with Indonesia and Europe to avoid Russia gas at $14/mcf and political blackmail from Putin.
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Permalink Reply by Jack Blake on
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Jack Blake will drink the kool aid if it'll get the price up to $10/mcf.
LONG LIVE THE HAYNESVILLE SHALE HOWLED JACK BLAKE!!!!!!!!!!!!!!!!!!!!!!!
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Permalink Reply by Two Dogs, Pirate on -
LONG LIVE JACK BLAKE HOWLED THE HAYNESVILLE SHALE!
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Permalink Reply by Dion Warr, CPL on
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Jim:
We may not import from Qatar, but the US military does have a significant base of operations in Qatar. Our presence does help them directly in an economic sense, but considering our relatively forward positioning in a friendly corner of a somewhat unfriendly region, the US may not want to tweak them too badly.
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Permalink Reply by Les Bamburg on
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WR, I finally carved out some time to read the document. Overall it is a good general information summary with a few minor flaws. Some descriptions & characterizations are not completely accurate but reasonably close. Just be aware that much has changed in the global LNG market since this report was written. Also, the capital cost and unit unit cost values shown for each LNG supply segment are significantly understated. For example the Sakhalin LNG project in Russia which will supply 9.6 million tonnes per year (~ 1.2 Bcfd) has a capital cost of $22 billion.
Some of the more important points are as follows:
- Spot LNG cargo trade is < 1% of the global gas consumption.
- Spot LNG trades must become a much larger portion of the overall LNG trade for Atlantic Basin LNG prices to converge between Europe and North America and that is a long way off.
- LNG trade must gain a larger share to effect global gas prices. As long as pipeline gas is dominant this will not happen.
Bottom line is the report concluded there will not be a convergence of gas prices between Europe & North America in the near future.
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Permalink Reply by Sarah on
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Thanks for summing this document up for us Les. And thank you and Jay for all that you contribute to the forum. I said that yesterday, but deleted my post. I just really am thankful though that Keith even started this website and that you're here. And Jay! And many others who have helped us understand the shale better.
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Permalink Reply by Two Dogs, Pirate on
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Jay you are as good as it gets and I for one apreciatiate your input.
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Permalink Reply by w.r. frank on
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