Natural gas prices jump 12 percent
Natural gas prices spike 12 percent even with storage facilities bulging
On Monday September 14, 2009, 11:21 am EDT
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NEW YORK (AP) -- Oil prices dipped below $69 a barrel Monday though a strong rally for natural gas extended into its third straight day.
Prices jumped more than 12 percent in value for each per 1,000 cubic feet of natural gas on the New York Mercantile Exchange to start the week.
Rapidly spiking prices led to some talk on Nymex that a very large player in the market believes that, at least in the short term, prices have fallen too far.
Analysts at Goldman Sachs said prices for natural gas may even triple over the winter, though most energy experts believe there is a far greater chance that prices will plunge again.
There are two big factors that support the latter view, which would mean extremely cheap heating bills for a lot of people over the next few months.
The first is that natural gas in storage is 17 percent greater than it was last year and it is even nearing the maximum storage capacity in some places. And the U.S Energy Information Administration said in its short-term energy outlook that it expects another 12 percent buildup through October.
At the same time most meteorologists predict a very mild winter for large parts of the country. With demand already way down from industrial utility customers, the U.S. has an enormous amount of unused natural gas.
Oil and natural gas have historically tracked one another as far as prices go, but this year has been a different story. On Monday crude prices fell again as natural gas rose.
Benchmark crude for October delivery fell 84 cents to $68.45 a barrel. On Friday, the contract tumbled $2.65 to settle at $69.29.
A lot of pressure has been placed on the dollar-based crude because the dollar has rebounded in recent days. Oil prices have fallen about $4 during the last two trading days. Still, prices have doubled from earlier this year during what may have been the depth of the recession.
A lot of experts believe that optimism is premature because crude in storage, like natural gas, remains at very high levels.
Signs of an improved economic outlook have fueled optimism for growing demand for crude around the world, but supplies remain at high levels.
"At some point hope has to become a reality or prices will have to adjust accordingly," said PFGBest analyst Phil Flynn.
At the pump, the average price for a gallon of regular gasoline fell a tenth of a cent to $2.572, according to auto club AAA, Wright Express and Oil Price Information Service. That's 7.3 cents more than a month ago, but $1.22 less than at this time last year.
Gasoline for October delivery on the Nymex fell 1.41 cents to $1.7457 a gallon.
Prices have most certainly peaked for most motorists this year, barring some disruption in the Gulf of Mexico.
"The 'driving season' is over ... and supplies are greater today than in May," analyst and trader Stephen Schork wrote in his morning report.
In other Nymex trading, heating oil for October delivery rose less than a penny to $1.7329 a gallon. Natural gas jumped 38 cents to $3.342 per 1,000 cubic feet.
In London, Brent crude fell 13 cents to $67.56 on the ICE Futures exchange.
Associated Press Writers Pablo Gorondi in Budapest, Hungary, Alex Kennedy in Singapore and Stephen Bernard in New York contributed to this report.
Monday, September 14, 2009
Sunday, August 30, 2009
Is Natural Gas Cheap?
A good question analyzed by David Galland, of Casey Research
At the height of its late 2005 rally, natural gas in the U.S. was selling for just over $16/MMBtu, 350% higher than today’s price of $3.56. The oil/gas ratio, now over 18, is an all-time high… suggesting that natural gas is dirt cheap. So, it’s a buy, right? In a phrase, not exactly.
According to a recent report by Natural Gas Intelligence, U.S. natural gas available for production “has jumped 58% in the past four years, driven by improved drilling techniques and the discovery of huge shale fields in Texas, Louisiana, Arkansas and Pennsylvania, according to a report issued Thursday by the nonprofit Potential Gas Committee (PGC).”
According to the report, the increase in gas discoveries and production improvements means that North America shouldn’t have to be concerned about gas supplies for up to 100 years!
Dr. Marc Bustin provided an overview of the situation in the May edition of Casey Energy Opportunities.
In the United States, the tremendous growth in natural gas resources and estimated recoverable natural gas, particularly from gas shales, just in the last two years (Figure 1) is sending tremors through the entire industry. These tremors include the risk of making obsolete the proposed $26 billion Alaskan and $16 billion northern Canadian pipelines to tap northern gas resources and a slue of proposed LNG terminals… unless they are for export!
The numbers currently kicked around are that something around 2,000 trillion cubic feet of gas are technically recoverable in the United States. At current production rates, this supply would last about 90 years.
Some analysts are predicting that even if the U.S. economy recovers in the next year, the amount of gas discovered to date in gas shales will severely dampen any increase in gas price for some time. According to a new study by energy consulting firm CERA (Cambridge Energy Research Associates), new technologies for unconventional gas fields are being applied so successfully that supply is essentially no longer a driver in either production or price in the North American gas market – whatever the market wants, North American gas fields can supply. CERA reports that natural gas production in the Lower 48 states has risen a startling 14% from 2007 to 2008, for example.
Figure 1. The chart above depicts the Major shale areas or formations in the U.S. and the estimated recoverable natural gas in 2006 and 2008. Modified from Daily Oil Bulletin (May 4, 2009).
Given the increase in production and the small slide in demand, the price of natural gas has fallen to around $3.50-$4.00 per MMBtu (down from $13 per MMBtu last summer). At these prices, many gas prospects are uneconomic, and thus there has been a marked decline in the number of wells being drilled. Rig activity (how many rigs are operating) is down about 50% in North America.
But here is where an interesting feedback mechanism kicks in. One of the characteristics of unconventional shale gas wells, and to a lesser extent natural gas wells in general, is that the production rate declines through time. Most shale wells’ production rates decline 60 to 90% in the first year. If you were a gas company trying to survive amidst today’s low prices, the rate of return on your capital investment would also be painfully low for a significant amount of gas if this were your initial year of production.
Another complementary fact is that over 50% of natural gas consumed in the United States today is from wells drilled less than three years ago, and 25-30% of the gas produced today comes from wells drilled last year (Figure 2).
Hence it follows that if there are 50% fewer wells drilled this year (from the drop in rig activity), new production will decline about 35-40% by the end of the year, so there will be gas shortages. Those will in turn lead to higher North American prices, which in turn should lead to additional drilling.
Figure 2. Historical gas production in the U.S. showing the percentage of production from vintage of well (modified from Chesapeake April 2009 Investor presentation from original data of HIS Energy)
Everything else being equal (which it’s not, this being the real, not the mathematical world), gas prices and drilling will see-saw until an equilibrium is reached. In detail, of course, things are more complicated, but it is pretty clear that gas prices will have to rise within the year, and the big losers will remain the more expensive plays that require higher gas prices to be economic.
Where will the gas price end up in the short term? A poll of analysts by Reuters suggests $6 MMBtu in 2010 (Daily Oil Bulletin, May 4, 2009), but I don’t think I would bet on a gas price based on a vote by analysts. At the same time, it’s an interesting coincidence (or not – coincidence, that is) that many prospects become economic at around the $6 MMBtu range. Among them are the Haynesville and Marcellus shales – and it’s no large leap from there to see their tremendous gas production potential acting as a buffer to gas prices going much higher in the near term.
Thus, while there may be some seasonal and relatively short-term trading opportunities in natural gas, the overhang of ready supply places a fairly firm cap on the price. Which begs the question, which big-trend energy opportunities should be getting our attention today?
Marin Katusa, who heads the Casey Research energy team, answers the question by, correctly, cataloging the opportunities according to geography.
In North America 1. Geothermal — the most interesting of the alternative energy sources, by a wide margin.2. Nuclear.3. Oil.
In Europe1. Unconventional gas has, by far, the most upside.2. Unconventional oil.3. Small hydro (such as run of river).
In Africa First and foremost, you want to avoid infrastructure plays (pipelines, refineries, etc). Then you want to look for areas with huge oil potential, which have been held off the market by concerns over political risk. I like what Lukas Lundin is doing in Ethiopia, Somalia, and Kenya, hunting for “elephants” with the idea of eventually selling the discoveries off to the Chinese.In Asia,1. Liquid Natural Gas (LNG)2. Coal Bed Methane (CBM)
Lessons to Learn
There are a couple of useful lessons to be derived by investors looking to tap into the virtually unlimited opportunities in energy.
First, just because something is “cheap” doesn’t mean it can’t stay cheap, regardless of historical ratios — if there has been a fundamental shift in the supply/demand equation. Which is very much the case with North American natural gas.
Secondly, geological and transport considerations make much of the energy complex a “local” market.
For example, while North America enjoys an abundance of natural gas, Europe is forced to rely on the heavy-handed Russians for the bulk of supplies. As you read this, there are companies looking to break the Russian grip by applying the same unconventional gas technologies that have so successfully built gas supplies in the U.S. — technologies that are only just now being applied in Europe. Early investors could reap huge profits.
In short, the real opportunities are not found by simply “investing in energy” but rather by taking the time to understand the structural differences within the energy complex and cherry picking the special situations that invariably exist in a sector this large.
David Galland is the managing director of Casey Research, LLC., a private research firm providing independent analysis and investment recommendations to individual and institutional investors in North America and over 100 other countries around the globe.
At the height of its late 2005 rally, natural gas in the U.S. was selling for just over $16/MMBtu, 350% higher than today’s price of $3.56. The oil/gas ratio, now over 18, is an all-time high… suggesting that natural gas is dirt cheap. So, it’s a buy, right? In a phrase, not exactly.
According to a recent report by Natural Gas Intelligence, U.S. natural gas available for production “has jumped 58% in the past four years, driven by improved drilling techniques and the discovery of huge shale fields in Texas, Louisiana, Arkansas and Pennsylvania, according to a report issued Thursday by the nonprofit Potential Gas Committee (PGC).”
According to the report, the increase in gas discoveries and production improvements means that North America shouldn’t have to be concerned about gas supplies for up to 100 years!
Dr. Marc Bustin provided an overview of the situation in the May edition of Casey Energy Opportunities.
In the United States, the tremendous growth in natural gas resources and estimated recoverable natural gas, particularly from gas shales, just in the last two years (Figure 1) is sending tremors through the entire industry. These tremors include the risk of making obsolete the proposed $26 billion Alaskan and $16 billion northern Canadian pipelines to tap northern gas resources and a slue of proposed LNG terminals… unless they are for export!
The numbers currently kicked around are that something around 2,000 trillion cubic feet of gas are technically recoverable in the United States. At current production rates, this supply would last about 90 years.
Some analysts are predicting that even if the U.S. economy recovers in the next year, the amount of gas discovered to date in gas shales will severely dampen any increase in gas price for some time. According to a new study by energy consulting firm CERA (Cambridge Energy Research Associates), new technologies for unconventional gas fields are being applied so successfully that supply is essentially no longer a driver in either production or price in the North American gas market – whatever the market wants, North American gas fields can supply. CERA reports that natural gas production in the Lower 48 states has risen a startling 14% from 2007 to 2008, for example.
Figure 1. The chart above depicts the Major shale areas or formations in the U.S. and the estimated recoverable natural gas in 2006 and 2008. Modified from Daily Oil Bulletin (May 4, 2009).
Given the increase in production and the small slide in demand, the price of natural gas has fallen to around $3.50-$4.00 per MMBtu (down from $13 per MMBtu last summer). At these prices, many gas prospects are uneconomic, and thus there has been a marked decline in the number of wells being drilled. Rig activity (how many rigs are operating) is down about 50% in North America.
But here is where an interesting feedback mechanism kicks in. One of the characteristics of unconventional shale gas wells, and to a lesser extent natural gas wells in general, is that the production rate declines through time. Most shale wells’ production rates decline 60 to 90% in the first year. If you were a gas company trying to survive amidst today’s low prices, the rate of return on your capital investment would also be painfully low for a significant amount of gas if this were your initial year of production.
Another complementary fact is that over 50% of natural gas consumed in the United States today is from wells drilled less than three years ago, and 25-30% of the gas produced today comes from wells drilled last year (Figure 2).
Hence it follows that if there are 50% fewer wells drilled this year (from the drop in rig activity), new production will decline about 35-40% by the end of the year, so there will be gas shortages. Those will in turn lead to higher North American prices, which in turn should lead to additional drilling.
Figure 2. Historical gas production in the U.S. showing the percentage of production from vintage of well (modified from Chesapeake April 2009 Investor presentation from original data of HIS Energy)
Everything else being equal (which it’s not, this being the real, not the mathematical world), gas prices and drilling will see-saw until an equilibrium is reached. In detail, of course, things are more complicated, but it is pretty clear that gas prices will have to rise within the year, and the big losers will remain the more expensive plays that require higher gas prices to be economic.
Where will the gas price end up in the short term? A poll of analysts by Reuters suggests $6 MMBtu in 2010 (Daily Oil Bulletin, May 4, 2009), but I don’t think I would bet on a gas price based on a vote by analysts. At the same time, it’s an interesting coincidence (or not – coincidence, that is) that many prospects become economic at around the $6 MMBtu range. Among them are the Haynesville and Marcellus shales – and it’s no large leap from there to see their tremendous gas production potential acting as a buffer to gas prices going much higher in the near term.
Thus, while there may be some seasonal and relatively short-term trading opportunities in natural gas, the overhang of ready supply places a fairly firm cap on the price. Which begs the question, which big-trend energy opportunities should be getting our attention today?
Marin Katusa, who heads the Casey Research energy team, answers the question by, correctly, cataloging the opportunities according to geography.
In North America 1. Geothermal — the most interesting of the alternative energy sources, by a wide margin.2. Nuclear.3. Oil.
In Europe1. Unconventional gas has, by far, the most upside.2. Unconventional oil.3. Small hydro (such as run of river).
In Africa First and foremost, you want to avoid infrastructure plays (pipelines, refineries, etc). Then you want to look for areas with huge oil potential, which have been held off the market by concerns over political risk. I like what Lukas Lundin is doing in Ethiopia, Somalia, and Kenya, hunting for “elephants” with the idea of eventually selling the discoveries off to the Chinese.In Asia,1. Liquid Natural Gas (LNG)2. Coal Bed Methane (CBM)
Lessons to Learn
There are a couple of useful lessons to be derived by investors looking to tap into the virtually unlimited opportunities in energy.
First, just because something is “cheap” doesn’t mean it can’t stay cheap, regardless of historical ratios — if there has been a fundamental shift in the supply/demand equation. Which is very much the case with North American natural gas.
Secondly, geological and transport considerations make much of the energy complex a “local” market.
For example, while North America enjoys an abundance of natural gas, Europe is forced to rely on the heavy-handed Russians for the bulk of supplies. As you read this, there are companies looking to break the Russian grip by applying the same unconventional gas technologies that have so successfully built gas supplies in the U.S. — technologies that are only just now being applied in Europe. Early investors could reap huge profits.
In short, the real opportunities are not found by simply “investing in energy” but rather by taking the time to understand the structural differences within the energy complex and cherry picking the special situations that invariably exist in a sector this large.
David Galland is the managing director of Casey Research, LLC., a private research firm providing independent analysis and investment recommendations to individual and institutional investors in North America and over 100 other countries around the globe.
Saturday, August 15, 2009
HUGE BUYING OPPORTUNITY
Natural gas should see continued strengthening for several years as conversions are made. If you are long or even looking to the short term, the UNG should be a good investment.
Tuesday, February 17, 2009
Natural Gas looks to be having problems
Many of the commodity experts in the area of energy had some hype for this commodity. On fears of additional foreclosures and people not using as much energy, we could see this one keep trading in the low fours for a while. Long term it looks very good, and when it pops it will do it quickly, I currently have 21 calls on the UNG for 7/09. I would say long term the UNG is a buy, but no calls unless you like risk
Wednesday, February 11, 2009
US NATURAL GAS FUND ETF (UNG)
Natural gas has risen in popularity recently because of its environmentally friendly nature and also its price. There are many applications with respect to this energy source that are bullish to its fundamentals. It seems that the United States is pushing for more power plants to be made with respect to this commodity. Environmentalists are steering away from coal and into natural gas and uranium as nonrenewable, but constant fuel sources. Since there are concerns about what to do with the "tails" associated with nuclear energy and the vast natural gas resources of the United States may be leading us to natural gas. Also, natural gas plants can be constructed faster and at less expense than nuclear. Consumer sentiment tends to be a little better with natural gas, and if you don't believe me, just watch an episode of the Simpson's, where there are fish and squirrels with 10 sets of eyes. The only problem with natural gas is transport. As a gas it cannot go by pipeline for great distances and to liquefy makes it much more expensive. It is also a strange commodity as prices very a considerable amount from one section of the world to the other. Comparatively, with respect to the price in the United States, it is worth just pennies in Saudi Arabia.
If we are to compare natural gas to true clean and renewable sources of energy, they are not even viable. Wind, solar and geo-thermal will be used to some extent but without government subsidies they have difficulty competing with other nonrenewables. I would say the natural gas does have a considerable upper hand over these until some sort of a carbon credit and or tax on pollution is done. When this is done it may be viable. But until then, natural gas seems to be the place to be.
When compared to coal there is is only two factors that are really different, or at least important. Coal is prohibitive because of its pollutive nature and natural gas is more difficult to extract. This is what is important. If there is a carbon credit system, plants will go to natural gas as coal becomes more expensive. This process itself would make natural gas more appealing even in its gaseous state. Also, natural gas is expensive to transport but new technologies with respect to transmission lines may make it possible to run gas fired plants right next to large deposits and then have the electricity pushed over huge areas. This is also important for companies like ABB and American Superconductor. If it is possible to run electricity over long distances without losing its efficiency due to resistance through ceramic style wires these applications would be much more functional.
Many think that natural gas is a nonrenewable resource that we are running out of. This couldn't be further from the truth. The EIA estimates that there are 5210.8 Tcf of natural gas in the world with the United States having over 15% of that. Since the majority of the United State's reserves run from Wyoming, to Colorado and down to Texas, it proves the theory that new plants could be built in these areas and supply lines could be run to the east and west coasts to the areas of largest population. This expansion into natural gas would free up some of our coal reserves to use as an export to nations that need.
If we compare natural gas to oil there is a 1 to 6 ratio with respect to BTUs. This means that nat. gas is grossly undervalued. That means that oil should be 6 times more expensive but it is closer to 11 times. This can also be used as a clean way to replace oil. The reason is that with our vast resources we can liquefy it to run in vehicles, and further down the road supply our needs for electricity that will recharge the batteries of the nation's hybrids. I know this seems far away, but even large vehicles like the Chevrolet Suburban is now a hybrid and these concepts will continue as the Prius is one of the best selling vehicles in California. I am bullish natural gas and look for it to have a big rise with upcoming news on the Federal Government offering packages to support it broader use and its feasibility increasing with concerns about global warming.
Current levels seem very inexpensive, and current stimulus packages are heavy in infrastructure which could mean an increase in the building of natural gas plants. Even though oil is quite cheap now, it wont stay that way.
If we are to compare natural gas to true clean and renewable sources of energy, they are not even viable. Wind, solar and geo-thermal will be used to some extent but without government subsidies they have difficulty competing with other nonrenewables. I would say the natural gas does have a considerable upper hand over these until some sort of a carbon credit and or tax on pollution is done. When this is done it may be viable. But until then, natural gas seems to be the place to be.
When compared to coal there is is only two factors that are really different, or at least important. Coal is prohibitive because of its pollutive nature and natural gas is more difficult to extract. This is what is important. If there is a carbon credit system, plants will go to natural gas as coal becomes more expensive. This process itself would make natural gas more appealing even in its gaseous state. Also, natural gas is expensive to transport but new technologies with respect to transmission lines may make it possible to run gas fired plants right next to large deposits and then have the electricity pushed over huge areas. This is also important for companies like ABB and American Superconductor. If it is possible to run electricity over long distances without losing its efficiency due to resistance through ceramic style wires these applications would be much more functional.
Many think that natural gas is a nonrenewable resource that we are running out of. This couldn't be further from the truth. The EIA estimates that there are 5210.8 Tcf of natural gas in the world with the United States having over 15% of that. Since the majority of the United State's reserves run from Wyoming, to Colorado and down to Texas, it proves the theory that new plants could be built in these areas and supply lines could be run to the east and west coasts to the areas of largest population. This expansion into natural gas would free up some of our coal reserves to use as an export to nations that need.
If we compare natural gas to oil there is a 1 to 6 ratio with respect to BTUs. This means that nat. gas is grossly undervalued. That means that oil should be 6 times more expensive but it is closer to 11 times. This can also be used as a clean way to replace oil. The reason is that with our vast resources we can liquefy it to run in vehicles, and further down the road supply our needs for electricity that will recharge the batteries of the nation's hybrids. I know this seems far away, but even large vehicles like the Chevrolet Suburban is now a hybrid and these concepts will continue as the Prius is one of the best selling vehicles in California. I am bullish natural gas and look for it to have a big rise with upcoming news on the Federal Government offering packages to support it broader use and its feasibility increasing with concerns about global warming.
Current levels seem very inexpensive, and current stimulus packages are heavy in infrastructure which could mean an increase in the building of natural gas plants. Even though oil is quite cheap now, it wont stay that way.
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