natural gas prices: the impending crash or has it already begun ?
From the simple perspective of Economics 101, when the supply of a good or service increases without an offsetting increase in demand, the price of the good or service will decline. Somehow, the natural gas futures market has suspended belief in the basic principles of economics. The NYMEX forward curve shows natural gas prices were about $3.10 per MMBTU for December 19, 2011 and will be $3.40-3.50 per MMBTU for mid-2012 and $3.80-4.00 per MMBTU by early 2013.
However, U.S. production increased 1.5-3.5 BCFD per year during 2008-2011 but demand increased enough to offset growth in production only during 2010. During 2008, 2009 & 2011, demand in U.S. markets was nearly flat and rising U.S. production reduced imports. Most of the "low hanging fruit" has already been picked and further significant reductions in imports will be more difficult to achieve. Furthermore, with U.S. GDP growth likely to be weaker in 2012, total gas demand is unlikely to increase in 2012 or 2013. Yet, gas exploration companies continued to aggressively increase production -- perhaps by "selling" future production into the NYMEX forward curve.
In Q1 2011, natural gas prices at Henry Hub, the Houston Ship Channel and the Chicago CIty Gate market were $4.20-4.40 per MMBtu. With 3-4 BCFD year/year growth in domestic production but almost no year/year growth in demand , natural gas prices dropped to $3.15-3.40 per MMBTU in November or 20-25% below Q1 price levels.
As natural gas prices fall, gas exploration companies aggressively increased production to maintain constant revenue and meet debt and payroll obligations. So far, the decline in prices has not discouraged gas producers and they have not yet begun to reduce exploration activity to avoid further downward pressures on natural gas prices.
How low will natural gas prices have to fall before gas exploration companies begin to make the necessary but painful reductions in gas exploration activity to avoid an extended period of weak gas prices? We answer these and many other important questions for clients who subscribe to “NGL Markets in North America”.
