Natural gas pricing for the upcoming year

I am going to predict that pricing for natural gas for the next 12 months will be higher than the previous 12. I base this upon how low the natural gas storage levels are right now. This is obviously very good for the industry and landowners whose property is in production.

From the EIA:

There are currently 22 more weeks in the injection season, which traditionally occurs April 1 through October 31, although in many years injections continue into November.  EIA forecasts that the end-of-October working natural gas inventory level will be 3,405 Bcf, which, as of May 30, would require an average injection of 87 Bcf per week through the end of October. EIA's forecast for the end-of-October inventory levels are below the 5-year (2009-13) average value of 3,837 Bcf. To reach the 5-year average, average weekly injections through the end of October would need to be 106 Bcf.

The weekly natural gas storage report can be found here: http://ir.eia.gov/ngs/ngs.html

 

Does anyone have other insights?

 

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Permalink Reply by Philip Thackray on June 8, 2014 at 1:28am

More data  here

Certainly looks like gas prices are going to be better than projected a year ago.  The demise of cheaper coal for power burn (if the new policy is left in place) removes much downward pressure on gas prices.  Based on LNG exports, the processing and shipping costs and the foreign market prices it seems that $6 is currently the upper level price boundary for now.  Of course, we had some astronomical prices in the North East this winter but that is not the general market.

A market for the ethane would be nice!!

Phil

Permalink Reply by jason irvine on June 8, 2014 at 3:19am
Well informed and I agree with your opinion. The big concern I have is....as the infrastructure comes on line and more markets are using this basins gas will it drive the prices down? Hopefully that can be offset by shipping it more west and south as well. But the low storage levels should drive it up in the short term and at least hold it at current levels. I would hope that it hovers in the $5.
Permalink Reply by Philip Thackray on June 8, 2014 at 3:46am

I like the https://rbnenergy.com/ articles.  They are very informative although not always relative to local Utica/Marcellus activity.  Recent articles are free but articles over 30 days require a subscription.  Every Monday Kyle Cooper publishes the Natural Gas Summary and Outlook which I linked above.

While I think that the near future is upper bounded by $6 gas I think over the next year the high $4s will be the norm except in the NJ-NY-New England markets.  That is what the futures markets is predicting.  If the high $4 can be sustained that is great news for producers and landowners.

Phil

Permalink Reply by David Perotto on June 8, 2014 at 4:09am

Correct on the $4 being profitable. Range Resources most recent presentation has their total cost of production (all production and transportation) at 2.83 per mcf. That gives them a fair rate of return at $4 or more. Many other producers report similar costs, they will continue to drill at these market rates

Permalink Reply by Jack Straw on June 8, 2014 at 5:56pm

4$ NG is acceptable and marginally profitable for the wet gas portion of the Marcellus and the Utica where the NGLs massively contribute. Remembering that many of the operators carry significant expensive debt in order to finance their operations; 4$ NG is acceptable and marginally profitable for the most prolific portions of the Dry Gas Marcellus.

 

However for much of the Dry Gas Marcellus and other Shale Gas areas (Barnett Shale, etc.) it will take $6 NG (for a substantial period of time) in order for the rigs to return to most of the dry gas areas.

 

O&G Operators are not celebrating $4 NG; they are breathing a sigh of relief …. $4 NG can stave off bankruptcy, forced mergers, layoffs  … and they can still borrow and issue additional shares to finance their continuing obligations.

 

On a BTU basis; with WTI oil trading at $102, NG should be at $17/mcf.

NG at $4/mcf is an obscenity … indicative of the extent of oversupply.

 

Given that in only the most unusual of circumstances would NG trade (on a BTU basis) in parity to Oil …. but at (less than) 25% parity…. NG is DIRT CHEAP. If U. S. NG were globally fungible it should be at $8 here in the U.S. ($11-$13 offloaded in Spain, Korea or Japan) …. only the political and logistical ability to export significant amounts of LNG would (at this point in time) push NG towards $8.

 

True that Coal powered power plants are and will (forcibly) be retired; the utilities will try to drag this process out; as even at $4 NG …. Coal is still cheaper; they will prefer to burn Coal (as opposed to using NG for base load).

 

The O&G graveyards are filled with the corpses of those who believed that they could predict future prices …. and bet their own money on the basis of their predictions. It is fun to watch, but I am not yet ready to place any bets with MY money. The above is my opinion, as of this moment .... ask me tomorrow, and you might get a different answer.

 

All IMHO,

                    JS

Permalink Reply by Philip Thackray on June 9, 2014 at 11:13am

Clarification.  "If the high $4 can be sustained..."  I meant to say if gas prices in the high $4s can be sustained...

Phil

015334grltd9mPermalink Reply by 015334grltd9m on June 8, 2014 at 5:32am
These are the discussions that are productive on gms.
Permalink Reply by Elnathan Cory on June 8, 2014 at 3:27pm

I totally agree with that Ron!

Permalink Reply by Jack Straw on June 8, 2014 at 5:14pm

A highly respected colleague recently pointed out the following to me:

“Production is up 1.5 bcfd in the last month, and 7 bcfd year over year. That is 2.3 TCF as a yearly rate increase.”

 

It is not only the Gas Shales who contribute to NG production; the highly successful Oil Shales have contributed a lot of associated NG.

 

Taking the above to heart, I went through a ‘back of the envelope’ calculation.

 

7 bcfd x 7 days/week = 49 bcf/week

 

Robing my historical statistics from the hallowed AmericanOilman.com website (click on the ‘hot button’ labeled: AmericanOilman Gas Storage):

 

Looking at the first seven weeks of the injection season – year 2013 versus year 2014:

 

Calendar Week 16  31 bcf/49 bcf  difference = +18 bcf 

 

Calendar Week 17  30 bcf/82 bcf  difference = +52 bcf  

 

Calendar Week 18  43 bcf/74 bcf difference = +31 bcf

 

Calendar Week 19  88 bcf/105 bcf  difference = + 17 bcf 

 

Calendar Week 20  99 bcf/106 bcf  difference = +7 bcf

 

Calendar Week 21  89 bcf/114 bcf  difference = +25 bcf

 

Calendar Week 22  88 bcf/119 bcf  difference = +31 bcf

 

Average increase in injections year over year for the past five weeks = 181/7 = 25.9 bcf/week (3.7 bcfd).

 

The above would suggest that approximately ½ of the additional (year over year) production is currently making it back into the ground as stored natural gas. (as opposed to increased demand?).  Granted, this is a very simplistic calculation (ignoring weather, short sampling period, etc.); but it is in the least suggestive of what might eventually constitute reality. Making any predictions based on seven samples is hazardous (especially when one, Calendar week 17, could be anomalous); might like to revisit all of this in three or four weeks; would be nice to have at least as many samples as fingers.

 

Pushing the above simplistic calculation as far as possible:

 

Possibly 24 more weeks of injection x an additional 25.9 bcf/week injected = an additional 622 bcf potentially injected in 2014 versus 2013.

 

Weeks 23 – 46 injected in 2013 = (3834 bcf – 2141 bcf) = 1693 bcf  injected in last 24 weeks of 2013 injection season (an average of 70.5 bcf/week).

 

Current (2014) week 22 storage = 1499 bcf

 

Potential amount of gas in storage at end of 2014 injection season = 1499 bcf + 1693 bcf + 622 bcf = 3814 bcf

 

Fall of 2013, we went into winter with 3834 bcf in storage (end of week 46).

 

If the above holds true (a very big if); we should make it through the Winter of 2014-2015, warm and toasty.

 

If the above holds true (a very big if); there will be little likelihood of upward pressure on the price of Natural Gas. If the above holds true (a very big if); there will be little likelihood of significant downward pressure on the price of Natural Gas. What I have so easily calculated is doubtless not lost on the likes of Goldman Sachs (and the other Banksters); I do not listen to what they say … I studiously watch what they do.

 

When making any predictions, I am always fearful of the following: risks associated with extrapolation (I much prefer interpolation, it has treated me more kindly), assumption that it won’t be different this time (particularly with regards to weather), no acceleration in outside demand (industrial, additional exports to eastern Canada and Mexico, switching from coal to NG),  …………. and importantly, the constant specter of some Black Swan event (there are a number of unknown and unpredictable variables which could shortly negate all of the above; making it fodder for the recycling bin).

 

Consider all the above to be worth every penny you paid for it.

 

JS

Permalink Reply by David Perotto on June 8, 2014 at 10:44pm
Hi Jack,
There is one factor that will skew your analysis. The EIA now talks about NG power burn, Electricity generation from NG. The amount of NG going towards this should go up when it gets hotter this summer. How much effect this has remains to be ssen, but will lower the amount sent to storage during those times.
015334grltd9mPermalink Reply by 015334grltd9m on June 9, 2014 at 1:00am

How about export amounts?  I predict NG at $7 when Cheniere and Cove Pt. start exporting.

Permalink Reply by Philip Thackray on June 9, 2014 at 2:00am

Economics will not allow such prices.  See excerpt from RBN Energy report below:

"Prices between $4.50 and $5.00, are what we believe are needed and are a level that could remain stable for a long time.  EIA’s Annual Energy Outlook for 2013 (AEO2013) forecast constant-dollar prices that did not break $5.00/MMBtu until after 2025.  The more recent early release of the Annual Energy Outlook for 2014 (AEO2014 ER) shows higher demand and higher supply, but then forecasts prices about 30 cents higher than AEO2013 at $5.30/MMBtu.   Results to date suggest that the AEO2013 price forecasts are high enough to bring producers back to drilling for shale gas."

Report available here but requires a subscription

Phil

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