Deregulated Natural Gas
Natural gas prices are very attractive right now. The fact is current prices are matching the low prices seen shortly after the 2011/2012 warmest winter in 100 years. Shale production in the U.S. has been the key driver to the current low level of prices. The question is whether during the remaining part of 2015 and then in 2016 will the country see prices stay the same, go down or possibly rise. Is now a great time to fix a price for 12, 24 or 36 months?
Historically the natural gas market has been volatile with prices sometimes peaking at levels that threaten the existence of businesses and sometimes at very attractive low prices like now when supply outstrips demand. However, the picture of the future is changing and that will likely result in modest natural gas price increases:
– Due to low natural gas prices for the past year new drilling for natural gas in the country has declined considerably. The return on drilling investment just isn’t there to continue at the same pace as before. In June 2014 the number of active drilling rigs in the U.S. was 1873. In June 2015 the number was 859. Lower oil prices has helped lower the number of active drilling rigs as well. Producers of natural gas targets a well head price of about $4.50/MMBtu as the level required to ramp up drilling efforts. Current natural gas prices is near $3.00.
– Due to the large amount of U.S. produced Shale natural gas available during the winter of 2014/2015, even though the winter was cold throughout much of the high natural gas consuming mid-west and northeast regions of the country, U.S. storage levels stayed near 5 year levels and well above the very low storage level seen leaving at the end of the 2013/2014 winter. Even the spring of 2015 saw very high storage injections that has some forecasting that the U.S. will have a record high amount of natural gas in storage before the start of next winter. Injections in June 2015 began lagging behind storage injection expectations and really lagged behind June 2014 injections. Although the U.S. is still expected to have a near record amount of natural gas in storage before the start of the 2015/2016 winter season, the falling storage levels will be closely watched. Was the drop of storage injections due to the hot June weather in the country since natural gas is used much more commonly in the production of electric generation or has the drop in storage also related to the drop of active drilling rigs. Although each natural gas well can produce much more natural gas than seen in the past due to production advancements like horizontal drilling, the drop in the number of drilling rigs will eventually have an impact as the flush of new natural gas coming to the consuming market slacks off.
– In addition to the dropping rig count in the U.S. three other factors point to rising natural gas prices in the next year: higher use of natural gas in the production of electric, manufacturing plants using more natural gas instead of higher priced and dirtier coal and the preparation of LNG plants for late 2016 and 2017 for natural gas exports to natural gas starved and much higher priced Europe. The demand for natural gas is rising while the exploration of natural gas in the U.S. is declining. It could easily be reasoned that to balance the upcoming demand for natural gas in 2016 and 2017 with the supply needed to meet the increased demand, natural gas prices would need to rise to a level much more attractive for new investment and increased U.S. production. Experts are confident the natural gas is available in the ground. The economics for drilling for it needs to be attractive for natural gas producers to ramp up drilling efforts.
– Another factor that is factoring into the supply/demand picture of natural gas is our neighbors to our north and our south. The U.S. has for years has imported natural gas from Canada. In June 2014 the number of active rigs in Canada was around 236. In June 2015 the number dropped to 135. At the same time exports of natural gas to Mexico has increased as their manufacturing sector of their economy flourishes and grows.
As consumers and buyers of natural gas it’s very easy to get lulled into the complacency of low natural gas prices. We’ve all read the many articles about Shale production and how the U.S. is the number one producer of natural gas in the world. While this may be true the fact is that economics always plays a role and price volatility will exist. The supply and demand balance always will play a large part of where natural gas prices will be for consumers. One thing often overlooked since we don’t see it until it happens is the unforeseen events both domestically and globally that happens unexpectedly. What does a perfect storm for rising natural gas prices look like? It could be said that just having a colder than normal winter followed by a hotter than normal summer through much of the country whereby storage gets greatly depleted in the winter and due to the hot summer doesn’t get refilled to adequate levels in the summer would be enough to drive up natural gas Futures prices. Throw in other domestic events like hurricanes, a robust manufacturing sector, other natural disasters and any number of global events on top of weather related factors and natural gas prices could increase to extreme levels as we’ve seen occasionally in the past.
The fact is buyers shouldn’t buy out of fear. Buying with fear often means buying in a knee jerk reaction and paying too much for too long of time. Our advice at RD Energy is to plan ahead and have a buying strategy. RD Energy can help explain the market conditions so a buying strategy can be prepared and implemented based on knowledge and awareness. As a Certified Energy Procurement professional RD Energy works with its customers so buying decisions are budget focused and not fear focused. Contact RD Energy….let’s talk energy!
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