08.28
What important events did you follow over the past summer, and how did it shape your view of the world?
I follow crude and natural gas prices on a regular basis. At the beginning of the summer, natural gas prices were around the $4.30-$4.55 range per MMBTU. Natural gas closed on Tuesday at $2.88 per MMBTU. Meanwhile, West Texas Intermediate crude went from $58 to $71. To compare both in the same terms, one Barrel of Oil Equivalent (BOE) of natural gas is selling for about $16.71 ($2.88 * 5.8) I never imagined natural gas would get this inexpensive. I thought anything less $4/MMBTU would be completely impossible.
Why the disconnect between the two?
To begin with, natural gas production, both in the US and abroad, has grown significantly in the past few years. According to BP Statistical Review 2009, worldwide natural gas production increased 3.8% in 2008 and US natural gas production increased in 2008 by 7.5%. Compare this with an increase in crude production of 0.4% for the world and -1.8% for the US.
This large growth in natural gas production has come from the so-called “Shale play” in the US. Shale gas usually has extremely high production in the first year followed by large production declines in subsequent years. Moreover, due to the recession, there has been significantly reduced demand for natural gas; particularly from industrial customers (industrial demand declined 14.5% between May 2008 and May 2009) Total US natural gas consumption declined around 5% between the same period of time.
Another factor influencing the disparity between the two is the fact that crude oil can be shipped worldwide while natural gas is not so economical to do. You can produce crude oil say in Nigeria, put it on a tanker a ship it to many places in the world. Natural gas is another story. Natural gas cannot be so easily transported across oceans as crude can. Less than 22% of all US natural gas consumption is supplied by imports.
Current prices are below what many companies can produce it for, thus lower production in the future. As soon as the economy recovers, I believe we will see much higher natural gas prices.
Links:
http://www.eia.doe.gov/oil_gas/natural_gas/info_glance/natural_gas.html
http://www.bp.com/productlanding.do?categoryId=6929&contentId=7044622
The disconnect between crude and nat. gas. can also be associated to the lack of demand from factories in the mid-west and utilities switching to nat. gas substitutes (but I have not looked at the numbers) like coal or fuel oil.
my question is, what is break even level for producing nat. gas? With prices at seven year lows can producers continue to operate at $2.80/mmbtu?
I believe you’ve hit the nail on the head, we will see as this plays out. My estimation of this is US Gas prices will rise significantly as the economy and it’s outlook rise.
Jeffrey,
Thanks for you comment.
Demand from industrial consumers has gone down considerably from last year.
However, from the power sector, June 09 YTD vs. June 08 YTD demand is actually up by slight amount.
Another concern is, as I mentioned, that most of the production is from Shale gas. Shale gas, usually, produces a lot in the first year, but then declines and stabilizes afterward.
what is mean Demand from industrial consumers has gone down considerably from last year.
However, from the power sector, June 09 YTD vs. June 08 YTD demand is actually up by slight amount.
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