March 31, 2012

Natural gas update: How low can it go?

Natural gas currently trades at about 2.15 USD (Henry Hub at Nymex) and is moving lower each day from the high of about 14 USD in 2006. You can look at the price chart here: GoodmodeTrader. Soon, it will reach the lowest price over the last 10 years. We have written earlier about how you may make money from this: Natural gas prices are going through the floor.

But, the price can't move lower forever, since the price of a commodity almost always corrects itself to a long-term mean price. For example, the current price of natural gas discourages gas companies to look for new sources of natural gas. And if no-one is looking for new sources, the current supply is sooner or later going to decrease because a gas source does not offer an infinite supply of natural gas.

The energy expert T. Boone Pickens recently gave a talk at TED about natural gas:

What can we learn from T. Boone Pickens:
  • Natural gas is cleaner, cheaper, and available from within the US - compared with oil
  • The US is using 25 percent of oil consumed with only 4 percent of the population
  • The US should convert the nation's truck fleet - 8 million trucks in total - to run on natural gas. This could take about 7 years - counting from 2012
  • The easiest way for the US to not be dependent on trouble in the Middle East is to convert the US to natural gas. A war between Iran and Israel seems to be inching closer each day. And a war in the Middle East is probably going to increase the price of oil

Here are some other arguments why the price of natural gas may move up again:
  • The CEO of the Canadian gas producer Peyto says that he can see some signs that the gas production in US is declining. It is however hard to determine if this is because of reductions in new drilling or shut-ins of existing wells
  • There's an unwritten rule on Wall Street which says that is is a good idea to buy something which reaches a new 10-year low
  • Warren Stephens, like T. Boone Pickens, says that the US should start using more natural gas to run US trucks, and also produce electricity from natural gas
  • Year-over-year, the gas exploration looking for new sources of natural gas, is down 25.9 percent
  • The current estimate of undeveloped recoverable natural shale gas may be false. The recent forecast says that the technically recoverable resources of US shale gas are 482 Tcf, a 42 percent drop from the 2011 projection
  • Stricter emission regulations by the Environmental Protection Agency make it unprofitable to explore for new sources of natural gas with these low prices
  • The price of natural gas in Europe is about $13. With this price difference, it may be profitable to export the cheaper US natural gas to Europe. It is however more difficult to export natural gas compared to oil since you have to transform the natural gas to LNG - Liquid Natural Gas.