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Have Natural Gas Prices Bottomed?

January 27th, 2012

OMAHA (Capstone Energy Services) – The big debate this week is about why natural gas prices have suddenly surged upward and whether or not this price move is a market reversal or just an aberration in an overall depressed and declining market. After having declined last week to $2.29 per MMbtu, the lowest price in almost a decade, the February natural gas contract suddenly jumped up this week to close Wednesday at $2.729 per MMbtu. This 19% increase was initiated by the Chesapeake Energy announcement of an immediate cut back in existing natural gas production, a shifting of drilling rigs away from gas to liquids and crude oil and delays in bringing new wells into production. This announcement created significant uncertainty in the market regarding the overall industry response to existing depressed market pricing.

Certainly there are factors that justify the low prices: Storage is at record high levels and expected to remain there throughout the remainder of the winter season. Shale gas production has created the surplus and production continues to increase, apparently outstripping overall demand. Projects to increase natural gas demand, including conversions of power plants, construction of new industrial plants, vehicle use and construction of liquefied natural gas export facilities are still several years away. Nevertheless, concerns exist about the fragility of the surplus. Here are some factors to watch:

  • Production – More announcements of production reductions such as that from Chesapeake this week could keep prices up or move them even higher.
  • Weather – A late winter surge of arctic temperatures could reduce inventories enough to ease downward pressure on prices
  • Generation – With prices so low, some utilities may decide to temporarily bring down some coal fired units in favor of existing natural gas units.
  • Regulatory Actions – Any definitive actions by state or federal regulatory agencies to limit or reduce shale formation production or exploration.

While it is not likely that any of these factors will have a short term material effect on the current gas supply situation, they will have an effect on the futures market and, by correlation, the physical market. The possibility that supply may drop or demand might rise is usually shows up first in futures prices, because of the inherent uncertainty that these possibilities create.

This week’s price run up may turn out be an aberration because of the extent of the supply surplus, but it does demonstrate the nervousness that decade low prices have created amongst traders. Short (or long) positions require attention as volatility increases, which is precisely what may occur in the natural gas market during the months to come.

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By Ed Freeman

Energy Facts

Energy Facts

Natural gas can be used as a raw material in a variety of products, including paint, fertilizer, plastics and medicines.

Natural gas produces fewer emissions than other fossil fuels, with less nitrogen, sulfur, carbon and fine particulates.

Texas produces the largest amount of natural gas in the USA.

The biggest consumer of coal in the US is the electric power sector.

There are 17,658 electric utility generators in the USA.
 

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