Best of the Week
Most Popular
1. Five Charts That Show We Are on the Brink of an Unthinkable Financial Crisis- John_Mauldin
2.Bitcoin Parabolic Mania - Zeal_LLC
3.Bitcoin Doesn’t Exist – 2 - Raul_I_Meijer
4.Best Time / Month of Year to BUY a USED Car is DECEMBER, UK Analysis - Nadeem_Walayat
5.Labour Sheffield City Council Election Panic Could Prompt Suspension of Tree Felling's Private Security - N_Walayat
6.War on Gold Intensifies: It Betrays the Elitists’ Panic and Augurs Their Coming Defeat Part2 - Stewart_Dougherty
7.How High Will Gold Go? - Harry_Dent
8.Bitcoin Doesn’t Exist – Forks and Mad Max - Raul_I_Meijer
9.UK Stagflation Risk As Inflation Hits 3.1% and House Prices Fall - GoldCore
10.New EU Rules For Cross-Border Cash, Gold Bullion Movements - GoldCore
Last 7 days
Why Banks Will Be Slammed In The Next Crisis—And That May Be Good News - 23rd Jan 18
Medicare Premiums Are A Shared Pool - Coming Changes That Will Transform Retirement - 23rd Jan 18
Charged Atmosphere of Heavy Police and Security Presence at Sheffield Street Tree Felling Protests - 23rd Jan 18
Pension Crisis And Deficit of £2.6 Billion At Carillion To Impact UK - 22nd Jan 18
Two Factors for Gold That You Don’t Want to Miss - 22nd Jan 18
Why You Must Own Silver in 2018 - 22nd Jan 18
This Could Be The Hottest Mining Stock Of 2018 - 22nd Jan 18
Stock Index Trend Trade Setups for the SP500 & NASDAQ - 22nd Jan 18
Stock Market Deceleration / Distribution - 22nd Jan 18
US Markets vs Govt Shutdown: Stock Markets at all time highs - 22nd Jan 18
Land Rover Discovery Sport - 1 Month Driving Test Review - 22nd Jan 18
Why should you use high-quality YouTube to mp3 converter? - 22nd Jan 18
Silver As Strategic Metal: Why Its Price Will Soar - 21st Jan 18
Stocks, Gold and Interest Rates Three Amigos Ride On - 21st Jan 18
Why Sometimes, "Beating the S&P 500" Isn't Good Enough - 21st Jan 18
Bunnies and Geckos of Sheffield Street Tree Fellings Protests Explained - 21st Jan 18
Jim Rickards: Next Financial Panic Will Be the Biggest of All, with Only One Place to Turn… - 20th Jan 18
Macro Trend Changes for Gold in 2018 and Beyond - Empire Club of Canada - 20th Jan 18
Top 5 Trader Information Sources for Timely, Successful Investing - 20th Jan 18
Bond Market Bear Creating Gold Bull Market - 19th Jan 18
Gold Stocks GDX $25 Breakout on Earnings - 19th Jan 18
SPX is Higher But No Breakout - 19th Jan 18
Game Changer for Bitcoin - 19th Jan 18
Upside Risk for Gold in 2018 - 19th Jan 18
Money Minute - A 60-second snapshot of the UK Economy - 19th Jan 18
Discovery Sport Real MPG Fuel Economy Vs Land Rover 53.3 MPG Sales Pitch - 19th Jan 18
For Americans Buying Gold and Silver: Still a Big U.S. Pricing Advantage - 19th Jan 18
5 Maps And Charts That Predict Geopolitical Trends In 2018 - 19th Jan 18
North Korean Quagmire: Part 2. Bombing, Nuclear Threats, and Resolution - 19th Jan 18
Complete Guide On Forex Trading Market - 19th Jan 18
Bitcoin Crash Sees Flight To Physical Gold Coins and Bars - 18th Jan 18
The Interest Rates Are What Matter In This Market - 18th Jan 18
Crude Oil Sweat, Blood and Tears - 18th Jan 18
Land Rover Discovery Sport - Week 3 HSE Black Test Review - 18th Jan 18
The North Korea Quagmire: Part 1, A Contest of Colonialism and Communism - 18th Jan 18
Understand Currency Trade and Make Plenty of Money - 18th Jan 18
Bitcoin Price Crash Below $10,000. What's Next? We have answers… - 18th Jan 18
How to Trade Gold During Second Half of January, Daily Cycle Prediction - 18th Jan 18
More U.S. States Are Knocking Down Gold & Silver Barriers - 18th Jan 18
5 Economic Predictions for 2018 - 18th Jan 18
Land Rover Discovery Sport - What You Need to Know Before Buying - Owning Week 2 - 17th Jan 18
Bitcoin and Stock Prices, Both Symptoms of Speculative Extremes! - 17th Jan 18
So That’s What Stock Market Volatility Looks Like - 17th Jan 18
Tips On Choosing the Right Forex Dealer - 17th Jan 18
Crude Oil is Starting 2018 Strong but there's Undeniable Risk to the Downside - 16th Jan 18
SPX, NDX, INDU and RUT Stock Indices all at Resistance Levels - 16th Jan 18
Silver Prices To Surge – JP Morgan Has Acquired A “Massive Quantity of Physical Silver” - 16th Jan 18
Carillion Bankruptcy and the PFI Sector Spiraling Costs Crisis, Amey, G4S, Balfour Beatty, Serco.... - 16th Jan 18
Artificial Intelligence - Extermination of Humanity - 16th Jan 18
Carillion Goes Bust, as Government Refuses to Bailout PFI Contractors Debt and Pensions Liabilities - 15th Jan 18
What Really Happens in Iran?  - 15th Jan 18
Stock Market Near an Intermediate Top? - 15th Jan 18
The Key Economic Indicator You Should Watch in 2018 - 15th Jan 18
London Property Market Crash Looms As Prices Drop To 2 1/2 Year Low - 15th Jan 18
Some Fascinating Stock Market Fibonacci Relationships... - 15th Jan 18

Market Oracle FREE Newsletter

6 Critical Money Making Rules

US Natural Gas Glut To Gas Panic – Time For A Bull Run

Commodities / Natural Gas Jan 27, 2014 - 05:51 PM GMT

By: Andrew_McKillop

Commodities

Feast to Famine

Friday 24 January, as global stock markets and emerging market currencies took another hit, natural gas in the US – the world's lowest priced gas - soared by 9.6% in a single day, rising to $5.18 per million British thermal units (MBTU) pricing it at $30.04 per barrel of oil equivalent at the Henry Hub. Over the week, prices gained close to 20%. US gas prices on Friday were at their highest since June 2010.

Related to the Emerging market exit panic and the US taper down threat, from the Fed buying $85 billion a month of “troubled debt and assets”, to a mere $75 billion a month, investors had to run somewhere. Starkly underpriced US natural gas was the weekly winner.

Reeling back the story to 2010, the last time US gas was priced at $30.04 per barrel of oil equivalent, compared to the “natural price of oil” at nearly $100 a barrel, the “shale gas revolution” had gone critical and was running riot. Today, the sequels are coming fast.


Reeling back the story to 2010, the last time US gas was priced at $30.04 per barrel of oil equivalent, compared to the “natural price of oil” at nearly $100 a barrel, the “shale gas revolution” had gone critical and was running riot. Today, the sequels are coming fast.

This was a no-holds-barred drilling frenzy with a linked land grab as drilling concession prices soared like something from a Thorsten Veblen tale of late-19th century capitalistic madness. Drilling concessions were changing hands of several thousand dollars per acre for multi-square-mile patches! The fracking boom was in overdrive. Gas output grew like Topsy. With no surprise at all, US gas prices suffered a historic collapse.

The gas was however locked up inside the US, with small pipeline capacities for exporting it out of the US, in fact only to Mexico. Canada was itself experiencing, or suffering the same “frack gas frenzy” making it a non-market for US gas at any price. The only logical solution was therefore LNG export to the vastly overpriced gas markets of Europe and Asia paying 2 – 3 times the US price, sometimes a lot more, but LNG terminals cost big money and take a long time to build.
Of course the prospect looked interesting, to say the least. In April 2012, when the Japanese were paying around $17 per MBTU for LNG from suppliers like Qatar, natural gas in the US hit a nearly 15-year low of $1.92 per MBTU.

Predictions that the price would go to zero were of course to be found in the mainstream media, but by 24 January 2014 natural gas was up 170% from that historic low.

Volatile and Unreal Prices? Give Us More!

Like we know, US gas prices are volatile and were downward tilted, for years, while oil prices are still bludgeoned up, anytime they show weakness. So much for “transparent markets”, but the market volatility rationale however has its limits which are now close. US gas exports via pipeline to Mexico have grown, especially since additional pipeline capacity went into service last year and Mexico unsurprisingly switched increasing amounts of its power production, using its own oil, to cheap US natural gas. In turn, Mexico can in theory export more of its oil – while oil remains overpriced - but the process connects with a thing called “the real world”. Even building gas-fired power plants (let alone LNG terminals) takes time.

Like the USA, Canada has stampeded into the all-new business of LNG terminals-on-paper. Exports are moving forward – in people’s heads. Government and bureaucracy have invited themselves to the party adding another layer of time, and costs, to maybe building terminals – some day. Now we can add the potential and possible threat that US gas prices edge back up to say only one-half the oil price on an energy price basis - and we can be rather sure LNG terminal dreaming may terminate itself, almost before any of them are built at a price tag of billions each! The US already has some, if only a few LNG import terminals, built on the bet that US gas prices would stay high. Converting them to export terminals is not cheap.

Hyper low US gas prices, and the opposite in Europe and Asia, together with overpriced oil everywhere have had a swath of impacts – expected, unexpected, short-term, mid-term and even economic-structural. Almost none of them are either rational or useful.

Extreme effects have for example included the energy market maker banks in the US, at least until nabbed by the US FERC regulatory agency, switching electricity generated from coal-fired plants to the same utilities' gas-fired plants, either on paper or with help from the utilities in the real world. Also, a swath of US utilities have simply gone out and scrapped, not mothballed, their oldest and most inefficient, most polluting coal-fired power plants. In some cases in the US, but a veritable plague in Europe, the new gas-fired plants have to compete with windfarms and solar power plants, some days and some hours of the day. Gas-fired plants' economic performance often compares badly with the paper promises and projections.

Also, large global-oriented petrochemicals producers have started building plants in the US to use cheap natural gas as feedstock. What do they do if gas prices move back up? Also, the long-announced but always shy natural gas revolution in road transport has begun to show some signs of real world life. Gas demand is picking up, or can pick up! Prices can now be driven up.

On the other end of the gas pipeline however – for gas producers - ultra cheap US gas was a disaster for many gas drilling companies. Thousands of unprofitable wells litter the land, with producers “keeping going and hoping”, while others do not have that luxury. Billions of dollars were written off due to the land grab-drilling concession price frenzy. Real money invested in fake drilling permits and in pipelines that were never built during the US frack gas boom period - that we can date at about 2006-2012, has disappeared into the ground and into thin air where more and more gas is simply flared or vented.

Drill Baby Drill

Boom-slump means investors lured with false promises. In the physical and real gas industry, the bloodletting was epic, like something from Thorsten Veblen. Making the financial rollercoaster even more ridiculous in its effects, shale gas wells are particular in having sharp decline rates. New wells need to be drilled constantly to make up for the decline in older wells. If the “dry gas” price is ridiculously low and there is no “wet gas” to offset the costs through recoverable natural gas liquids and oil in the gas, the wells aren't drilled.

Industry restructuring now includes a clear movement from “dry gas” exploration and production, to any “wet gas” field or prospect. Dry natural gas is now something of a by-product. Often it is simply flared, as in the “bad old days” for major oil provinces like the North Sea, when gas was cheap or worthless. The highly productive Bakken shale-oil field in North Dakota, Montana and southern Saskatchewan now has a general rule whereby if dry gas is the only find, it is flared. Around 30% of the field's total gas output is either burned at the wellhead or vented to the atmosphere as a waste product. As in the North Sea and most other “oil-only” provinces of the past, and present, the low price of gas does not justify building pipelines to haul it away.

So the pipelines were not built. As a very simple result, but not evident to the average “well-briefed market player”, it seems, not enough wells are being drilled. Production in all shale gas plays combined – except for the Marcellus shale region of the NE – is already either stagnant or slightly declining. Hence gas prices have to rebound. Market players can be counted on to turn that into an explosion.

Drilling monitors like the Baker Hughes company note that even in the Marcellus field, the number of active rigs is down from its peaks in 2012. The decline in this case, like the others has been propelled by the gas pipelines on paper which were never built, to haul the gas away. Estimates suggest that several thousand gas-only wells in the Marcellus are presently shut-in, forming a kind of giant reservoir waiting for the happy day when the gas can be moved away.

We can add another hypothesis. The long-awaited, often-announced fall in the price of US and international oil to a possible “market rational” price level around $70 a barrel. Unless gas prices go exactly the opposite way, net and clear decline in US shale gas production is a real prospect. Overpriced oil will no longer cross-subsidize underpriced gas. So gas prices will have to soar.

All kinds of other neglected or ignored factor and drivers make for a forecast of US gas prices taking a leaf out of the gold price book – and only growing while other financial assets bite the dust. Due to the frack gas boom and ever-rising gas production at near double digit annual percentage rates through about 2008-2011, gas storage “became a thing of the past”. Add in a polar vortex cold snap able to freeze Niagara Falls, and US gas storage levels in mid-January 2014 were at an unsurprising all-time low since January 2005. When US gas changed hands at about $13 per MBTU.

Squeeze Baby Squeeze - The Natural Gas Squeeze

Exactly the same gung-ho speculative fever that Thorsten Veblen described, which slayed US gas prices over 6 years and drove them to near-zero can “seamlessly” run the other way. US gas prices before the fracking boom could on occasions top $15 per MBTU, which for Japanese is cheap gas but today can be a nice target price for the speculators.

Writing on his blog Testosteronepit, Wolf Richter said this week that betting on US and world gas prices is sometimes only a bet on the weather. To be sure he also added “You also bet on....market manipulation and the limitless availability of money from yield-chasing investors whose billions (will) fund years of over-drilling, which then crushes prices – and the financial models of these wells. Billions in mal-investment (will) get written off”.

And somebody has to pay for the gigantic waste – the consumer.

If its cold, prices will be up. Talk about polar vortices has a dollars and cents handle for gas prices. Decorative frills are added by analysts to get the gung ho speculative boom on the rails, for example: “Strong demand is expected to push gas inventories to very low levels with cold weather lingering”. Later on we can hear about the pipelines on paper that weren't built, and the sterling role of natural gas in “fighting” climate change and global warming. Anything will do for the snakeoil crowd working their snakegas act!

US natural gas prices, unlike US and world oil prices are not rigged in New York, but in Houston. The very few, rich and renowned (to market players) natural gas market maker funds have carved themselves a reputation for jagged-profile gas prices. US natural gas is famous for its price spikes, unexpected plunges when it should rise, and inexplicable rises when it should drop. Whenever its not a bet on the weather, its a bet on how a few Houston funds want the price to move – like guessing what Goldman Sachs wants as the oil price in New York, today. For the moment, any high price will do.

What counts is that a natural gas squeeze and “wild prices for US gas” are most certainly possible.

Obligatorily this has nothing at all to do with gas reserves, production or demand. World gas reserves are at multi-decade highs. Production is increasing rapidly. Gas transport capacities, both pipeline and LNG are growing rapidly. On a worldwide basis, gas demand is rising although certainly not runaway growth-style. When or if a gas squeeze can be engineered, paper-only will suffice, the breakout of US gas prices will be possible.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

Andrew McKillop Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules