There has been no shortage of discussion on the topic of natural gas. Obama most recently announced that he would support the market by subsidizing natural gas for vehicular use. Both Conoco Philips (COP) and Chesapeake (CHK) announced cuts would be made to their natural gas production in the U.S. as the price has faltered. The price of natural gas has tumbled to the lowest it’s been in a decade at $2.6 per million BTU and is a far cry from the $7 price it fetched prior to the recession. The issue has not been demand, but a glut of supply as the charts below will show. (A complete year for 2011 was not available, but production was likely up during the period.)
From the US EIA
*Net Storage Deposits are deposits to storage net of withdrawals.
There are a couple items worth noting on the data. The first is that residential consumption is up from 2006. Despite being hit by the recession, consumers have not curtailed consumption of natural gas. Had the price been higher this may not have been the case. Another item that also should not come as a surprise is that utility companies are purchasing more and more natural gas for the production of electricity as the price has come down. The data only goes to 2010 when the price of natural gas was 50% more than what it is today. Utilities will continue to soak up ever more supplies of natural gas should the price continue towards $0.
The likely long-run scenario is that this will not be the case. Both market forces and now political forces in Obama’s subsidy plan are working to purge the market of the excess. Companies are shutting down production and setting up liquefied natural gas facilities to ship the glut to foreign countries like Japan where prices are as much as 8 times that of the U.S. A similar scramble is happening on the demand side.
Companies from Dow Chemical which use natural gas as an input to their products to UPS which have found natural gas powered trucks to be economical will continue to chip away at the excess supply and attractive price that’s being offered.
The glut, however, is not likely to go away anytime very soon. As the Wall Street Journal reported today the exploration and production of natural gas in the US is not abating. The paper noted that capital expenditures as a percent of operating cash flow for 2012 are expected to be near 139% also indicating that not all market participants are rational. The Journal also dampened enthusiasm on natural gas powered vehicles as it noted that a 300,000 increase in these types of vans and trucks would only grow gas demand by 2%.
Still the collapse in the price of natural gas is nothing short of remarkable. Just as the fracking technology has lowered the cost of extracting gas, other technologies and uses will be developed to employ this abundance of natural gas. And with prices at where they are the incentives to develop the technology will be even greater.
2011 price = $2.6
Disclosure: Long Gaz