Looking at US natural gas one can see that prices have come down considerably over the past three to four years and you might expect them to finally have reached a floor; however, unusually warm temperatures and abundant supply will put further pressure on prices. The firm production growth since 2008 is likely to continue into 2012 and potentially drive up inventory levels. In the short to mid-term, we believe prices for natural gas could fall below $2 per million BTUs.
The strong growth was largely driven by increases in shale gas production over the past year. Demand for the same period only rose moderately though. In the near future production should still expand despite a slowdown in new drilling activities and keep the market oversupplied. At the same time the US has experienced one of the warmest winters in the past 60 years, which allowed natural gas inventories to swell to record levels.
Over the long term there are a number of factors that support the case that the importance and relevance of natural gas should increase. President Obama in his State of the Union speech has just recently taken a strong stand for an increased focus on natural gas in the US. “We have a supply of natural gas that can last America nearly 100 years, and my administration will take every possible action to safely develop this energy”, he said. One big advantage of natural gas is the fact that the distribution infrastructure is already there. Gas stations merely need to add a natural gas pump and off they go. We believe this gives natural gas an important comparative advantage when evaluating other alternatives such as electricity powered cars, where the whole infrastructure would have to be built up from scratch.
Storage providers place so-called “ratchets” in place to protect their fields. Ratchets are contractual obligations that require storage users to draw down their gas to a certain percentage volume by the end of withdrawal season in March. It is very likely that these ratchets could force a significant amount of gas from the inventory, as otherwise penalty fees may apply to the users. The flushing out of excess gas into certain local markets should result in lower cash prices in those regions.
The US domestic marketed production for 2011 outran demand by far. At the beginning of February some producers announced to reduce gas rig counts in the US. For prices to start rising again though, further production cuts would be needed. Another five or six producers would need to cut rigs on a similar scale; however history shows that the likelihood of this happening is not very high.