Where natural gas prices are headed in 2017 gas 85 vs 87


I remember siting in a 2005 meeting of market experts where everyone around the table agreed that at least 15% of natural gas consumed in the U.S. would have to be imported as liquefied natural gas (LNG) by 2020. At least 40% of the rest was expected to come from Canada via pipeline.

As the cost of drilling declined and the amount of extractable gas consistently exceeded estimates, serious discussion emerged about America becoming energy independent, a target likely to become reality even quicker when the prospects for a similar Canadian shale boom is taken into account.

In addition to environmental concerns over the fracking necessary to bring the gas up, the sudden additions to the national surplus produced significant pressure on the sector itself. A rising number of operating companies were threatened by the sheer size of the changes underway.

A natural gas well, even one in a shale play, is much cheaper to drill than anything beyond a very shallow (2,000 foot) oil well. However, a shale well’s primary production comes in over the first 18 months, after which it quickly declines. So producers have a much bigger front loaded volume flow.

Producers needed to replace declining production rates with new wells that were justified as replacement but hardly by the market as such. The combined spike in surplus production just put additional downward pressure on the price of natural gas and further reduced the profitability at the well head (where companies get paid well below the final market price).

At the current price for natural gas, companies are once again getting access to money (through debt and issuing new stock) needed to subsidize forward operations. This used to be the norm, with most producers operating cash-poor – bringing in less from gas sales than current operations cost. The difference was covered by debt or selling new stock, with sale revenue used for acquisitions, dividends, or stock buy-backs.

Increasing field efficiency and new technology has further lowered costs. With natural gas trading north of $3.50, wells in basins such as the Marcellus are now profitable. But this is still a precarious balance… My Natural Gas Price Forecast for 2017

The transition from coal to gas for electricity generation is already well underway. In addition, the export of LNG from the U.S. to higher-priced markets has begun, with the guarantee of adequate supply for the establishment of spot markets elsewhere likely to offset the higher cost of bringing U.S. LNG into competition.

Then there is the widening industrial use for gas and the transition from gasoline to LNG and compressed natural gas (CNG) for vehicle fuel – both in normal and hybrid engines. That exchange has been accelerating on the large-end truck side of the scale, along with metropolitan buses and taxis. The smaller car engine part of the spectrum will still take a bit longer.

As for the surplus, in the U.S. it currently stands at about 4 trillion cubic feet. While high, it’s been stable and is now only slightly above the five-year average. This should be enough to provide a floor supporting a slowly strengthening price.