The Future of Natural Gas Prices: a View from October 2009

Michael Giberson

A short Associated Press item from last week provides a perfect illustration of the near-meaninglessness of the daily post-market story interpreting price moments.

Natural gas prices tumbled yesterday after the government reported the United States is using so little that it has more in storage now than at any other time on record.

The report was welcome news for homeowners who use natural gas. Suppliers already have cut rates in many parts of the country, and a continued drop in natural gas prices should convince others to cut prices. Natural gas for November delivery fell 34.7 cents, or 7.2 percent, to $4.49 per 1,000 cubic feet in New York.

The November futures price for natural gas spent most of last week between about $4.80 and $5.00, and that “welcome news” for homeowners was just a one-afternoon price dip.  The next day prices were back around where they had been two days earlier.  Sure, prices are well below their 2008 peak levels, but they have been below $5 most of the year.

What’s more, the $4.49 price is higher than the prices that have prevailed since February. It is the slow creeping up of prices that is welcome news, but for producers, not homeowners.  While natural gas prices usually pick up in October as the temperatures turn colder, short term supply and demand side issues make the “usual pick up” a little less certain than usual.

The real welcome news for homeowners (and select producers) is in announcements such as contained in this Houston Chronicle story: “Mammoth Discovery: Companies bet big on South Texas gas find.”

Last October, just as the economy was tilting into crisis, a small oil and gas company in Houston quietly announced the discovery of a mammoth natural gas field in South Texas that at any other time might have garnered bigger headlines.

Petrohawk Energy’s find, however, did not go unnoticed in the oil and gas industry — and it didn’t take long before oil companies large and small began making their moves.

Today, though the economy and natural gas prices remain weak, the Eagle Ford shale remains one of the hottest prospects in North America, and energy companies are moving forward there even as they’re pulling back elsewhere.

That’s because of what some companies suggest is a virtually recession-proof combination of highly productive wells and low drilling costs they say can yield profits even as natural gas prices hover near seven-year lows.

Emphasis added.  Good news for natural gas consumers and for those producers who are in on the development.  More:

Recently discovered U.S. shale plays, including the Haynesville in Louisiana and Marcellus in Pennsylvania, are expected to provide a major boost to U.S. natural gas supplies in coming years. The dense rock formations, once thought too difficult to explore, have been unlocked with the help of recent advances in drilling technology.

The core areas of the eight largest U.S. shale plays may contain 475 trillion cubic feet of recoverable resources, according to an estimate by Ross Smith Energy Group, an industry research firm in Calgary, Alberta. That’s roughly ten times the size of Texas’ famed Barnett shale play in the Dallas-Fort Worth area, which supplies nearly 10 percent of U.S. natural gas production, excluding Alaska.

$3.88 break-even point

While the Eagle Ford is among the smallest of the group, with some 19 trillion cubic feet of natural gas remaining, the economics is among the best, the firm said.

Producers in the Eagle Ford can break even when natural gas is priced as low as $3.88 per million British thermal units, the firm said, versus break-even prices of $5.18 in the Barnett, $3.74 in the Marcellus and $4.49 in the Haynesville.

While market prices for natural gas will continue to bounce around due to seasonal changes, storage dynamics, and various macroeconomic conditions affecting demand, it seems hard to believe that prices could stay above the mid $5 range for long anytime in the next decade.

UPDATE via Forbes: “[Pritchard Capital Partners] forecasts natural gas will average $6.50 in 2010.” But overall, the Forbes piece fits my outlook; the article ends by noting the EIA “expects the annual average spot price to rise from $3.85 in 2009 to $5.02 in 2010.”

2 thoughts on “The Future of Natural Gas Prices: a View from October 2009

  1. It seems the growing availability of low price natural gas should cause a move away from oil. How much oil demand can gas replace?

  2. While plentiful supplies of natural gas would be a boon for the US I’m not so sanguine. The quoted quantity estimates are for gas in the ground, yet to be found in economically drillable pockets. The prospect of a lot of gas per well means that drilling costs would be low, well completion and workovers will require expensive new techniques. The cost breakevens are at the well head with collection, transportation, and distribution still to be added to the end-user’s price.

    I’m on the West Coast and these finds have much better pipelines to East so our natural gas costs would not be so positively impacted.

    I hate to rain on someone’s parade but oil and gas guys too often boast and engage in puffery when announcing their finds.

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