Natural Gas Prices – Historical and Forecast

Natural gas futures prices in Canadian $/GJ are in red. The 12 month forecast is created for educational purposes and considers the forward 3 year futures price curve, analyst opinion, weather, oil prices, gas storage, drilling rates and economic indicators.

Gas prices are going up ! No they're not!

Here is a very good article on valueinvestorcanada.blogspot.com going through this argument. If you're short of time, here is the summary. The article is written by an equity analyst since rising gas prices would be good for people holding stock in gas suppy companies.

#1 - Any energy company that can move capital spending away from natural gas drilling and into oil is doing so. Why would anyone drill for natural gas that offers little if any return on investment when they could drill for oil at $100? (Ed. Jan 23-12 article on a major driller doing just that)

#2 - Drilling required to hold acreage has pretty much ended. In many of the big gas shale plays (Haynesville, Barnett) a condition of leases is that the property must be drilled within a specific window of time. Now that a company has a choice, it is going to drill an oil well, not a gas well.

#3 - U.S. LNG import facilities are being converted to LNG export facilities. Natural gas is mainly a local commodity as it is difficult to transport, meaning that gas production has been stuck in the United States getting low local prices. Starting in 2015 natural gas can be transported away from the states and sold into the global market via LNG exportation. Gas costs over $10/mmbtu in Europe and over $15 in Asia.

#4 - A continued shift from coal to natural gas as a source of power. Historically there have been concerns about the availability of a long term supply of natural gas for power generation. Those concerns are gone and the economics now make sense. So does the environmental impact. Demand from power producers for natural gas is only going to increase in future years.

#5 - At some point won't the government get behind a plan to move to natural gas as a transportation fuel? Instead of having to rely on the Middle East, Venezuela and Nigeria to provide oil to the U.S. wouldn't it make more sense to use natural gas which the U.S. has in abundance?

So we seem to have a pretty good reason to believe in a rebound in natural gas prices on both the supply side (drilling reduced, exporting LNG) and the demand side. The last line of the article summarizes the dilemma. "But while I have some ideas, and I think the bullish natural gas argument has some merit, I just can't convince myself that we won't have another five years of depressed natural gas prices. Of course if I wait to see an improvement in the natural gas market it may be too late to get into these equities at attractive prices."

May 2011 - Natural Gas: The turnaround kid in waiting - The Globe and Mail - May 31, 2011. For years, natural gas has been unloved and undervalued, a commodity whose price has faltered so badly that even some of it its biggest producers have written off the possibility of a comeback for nearly a decade. But now, a growing number of observers say evidence is mounting that gas prices are nearing a turning point, and that the stage is being set for a revival as soon as the next few months.

Apr. 2011 - President Launches Broad Review of Hydraulic Fracturing - NGI's Shale Daily - April 4, 2011. With natural gas now front and center on President Obama's energy agenda, his administration has called for a broad-based panel to be formed to examine potential risks associated with hydraulic fracturing (fracking).

Apr. 18 2011 - Natural Gas Price Increases a Natural Result of the Pickens Gas Vehicle Plan? Attain Capital Management. Discussion about whether the proposal by T Boone Pickens to convert America's trucking fleet to natural gas, which has been introduced to congress, will force up the price of natural gas.

Jan. 2011 - Natural gas costs unlikely to remain low through 2011 - Globe & Mail - Jan. 3, 2011, David Parkinson. The effect of shale gas on supply and inventories is a balance between the large number of drilling sites and the emerging opinion that these wells deplete more rapidly and therefore have a high production cost.

Jun. 2010 - Building a Case for Natural Gas - Globe and Mail - June 30, 2010. An opinion by Dean Orrico of Middlefield Capital Corp. The Idea: Buy natural gas stocks, trusts or exchange traded funds because prices are headed up rather than down.

Feb. 2009 - What caused the Oil and Gas rise, and fall. A presentation by Simmons & Company, an independent investment bank specializing in the entire spectrum of the energy industry.

Jan. 2009 - Signs of a gas bottom, Financial Post.

“The economic recession and demand destruction, such as the closing of industrial plants, is causing a decline in consumption. In the absence of a supply response, an economic recovery would be needed to balance the market.

“Fortunately, natural gas supply is very price elastic and production rates decline much faster for new gas wells than for oil wells. Natural gas wells lose 30% or more of their production capacity after the first year and more than 50% after two years. Up to 50% of North American gas production comes from wells drilled during just the past five years. Total industry production capability from existing wells declines by an average of more than 20% per year. In the absence of a sufficient quantity of new wells being drilled, supply goes down.

“Thus, analysis of supply activity, that is drilling rig activity, provides a significant leading indicator of supply response.”

Aug. 2008 - Is natural gas undervalued? Financial Post.

“A stunning six-week decline in prices of crude oil, natural gas, and energy stocks bottomed out in mid-August. A rally through Thursday last week saw crude oil recover one-quarter of its losses, while energy stocks recovered one-third of losses. However the greatest losses and smallest rally was in natural gas prices, raising the question: is natural gas undervalued?”

Go to the Price Charts

What Drives Prices ?

Short Term - Weather, the US economy and gas storage levels.

• Pick your scenario. If this winter is warmer than normal and the US economy continues at it's current pace, the US Dept of Energy predicts that gas prices will rise by about 5%. However, if this winter is colder than normal, the DOE says that consumers can expect double digit percentage increases. What is it going to be? Check out this weather forecasting site.
• Gas storage levels coming out of the winter are higher than average

Long Term - Economic activity, demand/supply balance and the price of oil.

• Natural gas demand in North America is increasing at about 3 % per year whereas supply is increasing at about 1%
• Increasing economic activity, growth, new businesses and new homes increase gas use
• Production from many older gas wells is declining quite rapidly. More
• More natural gas is being used for electricity generation. Any new electricity capacity brought on line right now is generated by natural gas, rather than oil, coal, water or nuclear.
• As the price of crude oil increases, some industries switch to natural gas. Many developed this dual fuel capability when gas prices skyrocketed in 2001.
• Prices are not expected to come down until new major gas pipelines are built connecting new gas fields in Alaska and the Northwest Territories. That is at least 6 years away. Recent reports however suggest that virtually all of this northern gas will be used in to extract oil from the tar sands in Northern Alberta.
• Liquified Natural Gas (LNG) will become a factor in North America, but many terminals and custom tankers will have to be built.

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There are many suppliers with consumer energy rates, natural gas prices and electricity costs in Canada including Direct Energy, OESC (Ontario Energy Savings Corp), AESC, Superior (SEM), Epcor, Enmax, Constellation NewEnergy (CNE), CEG, BCESC, Universal Energy and RiteRate. This information on electricity suppliers and open market rates is valid for Ontario, Alberta, Quebec, Manitoba, Saskatchewan, and BC (British Columbia). It covers gas distributed by Enbridge, Union, Kitchener utilities, Kingston, ATCO, Direct Energy Regulated Services, Teresen, Epcor ENMAX and GazMet. Canadian natural gas prices are available for deregulated provinces.

Some US states are deregulated and several have quite active markets. Georgia, Texas, Pennsylvania, Illinois and Ohio are active in 2007 and have the longest history. The most active marketers in Georgia are MX Energy, Georgia Natural Gas, Coweta-Fayette EMC, Gas South, GasKey, Infinite Energy, SCANA, Vectren and Walton EMC.

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