Friday, May 4, 2012

US Natural Gas Price Nears $10 per Barrel Equivalence

While the average pump price of gasoline has held the attention of most Americans for much of this year, the price trend for natural gas has been equally dramatic in the opposite direction. Gasoline prices flirted with the psychologically important $4 per gallon mark for several weeks before receding to around $3.82 today. Meanwhile natural gas prices continued their steady drift downward, briefly crossing $2 per million BTUs (MMBTU) before recovering slightly. To put this in perspective, when the spot price of natural gas bottomed out at $1.82 earlier this month, it was selling for the energy equivalent of oil at $10.56 per barrel. The last time oil prices were that low was during the Asian economic crisis of the late 1990s, and we're still feeling the consequences of that crash. The longer-term impact of today's dirt cheap natural gas is likely to be quite different, however.
Oil and natural gas used to be joined at the hip, and in the minds of many people they still are, even though the days when most US natural gas was a direct or indirect byproduct of oil production--either produced with oil or found by accident when a company was drilling for oil--are long past. The vast majority of our gas comes from dedicated gas wells in fields that were explored because of their gas potential, with shale gas and other so-called "tight gas" increasingly dominating output. The widely discussed shale gas revolution is the main reason natural gas is so cheap today, instead of costing over $10 per MMBTU as it would if shale gas hadn't happened and the industry's expectations about increasing LNG imports had materialized instead. Unfortunately for producers, because the surge of shale production has coincided with a weak US economy that is still struggling to get out of first gear, post-recession, the shale gas bounty is turning into a temporary glut.
Here's why the distinction between modern oil and gas production dynamics matter. When oil prices crashed in the late 1990s due to the combination of weaker-than-expected global demand and growing production, producers cut investments and scaled back new projects. Because of the time lags inherent in big oil projects the impact of those decisions was felt in the middle of the last decade, just as demand growth in the developing world hit its stride. Other things were happening, as well, but there's a good case that $10 oil in the late '90s helped set up $145 oil in 2008 and contributed to the persistence of prices well over $100/bbl today. So is the current natural gas price slump setting up a spike back over $10/MMBTU within a few years? I think that's unlikely, though I do believe gas prices will recover somewhat.

Read more: http://www.energytribune.com//articles.cfm/10495/US-Natural-Gas-Price-Nears-$10-per-Barrel-Equivalence

1 comment:

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