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 Grillin' - MmmMmm on -
Jim: we found a topic that we agree on! Based on the analysis done by a lot of folks, you are spot on. CERA recently issued a study with that exact conclusion as have several other firms. The incremental operating costs of liquifying, shipping and re-gasification are extremely low, once the owners have spent the capital to build the plants and ships. To recoup that capital, they have to keep the plants up and running, even if it means eeking out a small profit. It will cost probably less than $2/mmBtu to put LNG back in to gaseous form on the Gulf Coast. That will hurt!
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Permalink Reply by The_Baron on
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add to the fact that industrial demand has collapsed, and we could see cheap gas for some time unless the economy recovers worldwide.
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Permalink Reply by Skip Peel - Mineral Consultant on
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Now that parker has attracted such an impressive panel of GHS members, I would like to ask if you guys see a future where a greater percentage of domestic natural gas production comes from unconventional reservoirs resulting in the ability to curtail and increase production over a shorter time span as needed to maintain a healthy supply/demand balance? And thus reduce the wide price swings that have plagued the industry since its inception.
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Permalink Reply by Les Bamburg on
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Skip, I believe unconventional gas supplies will be more difficult to moderate than the conventional gas supplies of the past. Also, keep in mind how hedging plays a significant role in how different companies react to price swings. Finally todays independent producer is much less balanced between oil and gas revenue and doesn't have a position in downstream activities such as oil refining and gasoline marketing.
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Permalink Reply by Skip Peel - Mineral Consultant on
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Les. I am not thinking of an individual company's vertical integration nor it's hedge position. I am speculating that shale gas production allows the natural gas industry greater control of supply. With wells that have high initial production and steep declines, supply can be increased or decreased in a shorter time span. And avoid extreme swings in price. IMO, a less volatile market would be beneficial to producers and end-users. And lessen the importance of hedging production which is much more difficult for smaller independents to accomplish.
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Permalink Reply by Les Bamburg on
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Skip, having a large inventory of drillable locations does help deal with the longer term gas balance issues. But, natural gas price volatility is a shorter term event driven by weather & pipeline outages. Increased gas storage and LNG import capacity allows greater ability to moderate regional and seasonal price spikes. And, of course greater oversight of the energy trading business.
I would note there is way too much focus on daily Nymex natural gas prices as most natural gas is bought and sold on a monthly basis.
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Permalink Reply by Les Bamburg on
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Jim, actually the new LNG liquefaction capacity is coming online in the next ~ nine months in Qatar, Russia, Indonesia & Yemen. Probably something on the order of 5 Bcfd of new LNG supply.
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Permalink Reply by sesport on
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Les - from what I understood when this was previously discussed, the LNG brought here (US) was for storage and later to be exported to other countries. Is there a US market for it, did I misunderstand something, or has something changed?
Thanks - sesport
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Permalink Reply by Les Bamburg on
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Sesport, the previous discussion concerned the fact that two new LNG Terminals on the Gulf Coast had applied for LNG export permits. The discussion clarified that these two terminals were not liquifying natural gas, but rather were exporting LNG that had been previously imported and stored.
All these LNG Terminals were built for the primary purpose of receiving imported LNG for regassification and delivery into the US gas pipeline network. There is minimal need & market for the imported LNG over the next couple of years but the global recession will likely result in some LNG being "dumped" in the US market.
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Permalink Reply by sesport on
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Ah ... thanks, Les. I missed the part about regassification & delivery into the US, I guess.
Have a great day - sesport
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Permalink Reply by w.r. frank on
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Les. below is a link to a study at Univ. of Oklahoma on LNG markets and possibility of price convergence between Atlantic and Pacific. Interesting stats on amount of LNG actually sold on spot market and on costs of LNG-E&P, Gasification, Transportation, Regasification. Also, comment on costs of new facilities vs. those in place now.
Other than EIA totally missing domestic production in 2008, which throws all data off for future, there is a lot of good info. My conclusion, is few new plants will be built until Matt Simmons "peak gas" theory proves out as it will take $5 mmbtu to make sense. However, when European and Asia markets have demand depression, plus off season lack of storage, LNG will be dumped in US so long as variable costs recovered and some cash flow to cover fixed costs.
www.sec.ou.edu/mee/pdf/Research%20Papers%2007/Price%20Convergence_L...
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Permalink Reply by Les Bamburg on
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WR, thanks for the link. Interestingly, I had a copy of this study on my computer but can't recall if I read the document. I plan to read it through and will give some feedback on the content.
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