Will natural gas drop to $1?
http://online.wsj.com/article/SB1000...488679458.html
http://online.wsj.com/article/SB1000...488679458.html
By LIAM DENNING
Natural-gas prices are on the floor. Could they go negative?
The overhang of excess natural-gas supply could crash prices even further this spring. Liam Denning discusses on The News Hub with Simon Constable and Bob O'Brien. Photo: Reuters
The probability that wholesale gas prices will drop below $2 per million British thermal units, from today's almost $2.50, is rising. Gas hasn't closed below $2 since September 2009. Today's market shares one critical similarity to then: bulging gas inventories. This overhang of excess supply could crash prices even further this spring.
Like squirrels with nuts, we humans store gas during the summer and then deplete those inventories in the winter. But this winter has been mild and comes amid rising gas production. The latest official figures, released Thursday, show the U.S. has about three trillion cubic feet of stored gas, up 25% from this time last year and the five-year average.
Barring a sudden chill, we will enter summer with gas inventories well above normal. This is a problem because storage operators often need to cycle gas through a facility on a seasonal basis to maintain operational efficiency. Companies that leave gas in storage beyond their contracted time usually risk stiff financial penalties. Morgan Stanley forecasts there will be 2.2 trillion cubic feet of gas in storage at the end of March, which is traditionally when we start refilling inventories. However, that level is very close to the 2.3 trillion cubic feet level at which, Morgan Stanley estimates, storage operators start forcing clients to take gas out.
This carries big risks for prices. BofA Merrill Lynch points out that back in 2009, when capacity limits were again being tested, gas prices almost halved in the space of a month between early August and early September.
But there have been even more extreme instances. In the U.K., for example, gas prices very briefly turned negative in October 2006, after a new pipeline from Norway flooded the market when storage capacity was nearly full already. Rather than pay penalties for causing imbalances in the system through excess gas, some traders preferred to simply pay someone else to take delivery.
[NATGAS] Bloomberg News
Companies that leave gas in storage beyond their contracted time risk stiff financial penalties. Above, a drilling rig sits on a natural gas pad in Pennsylvania.
That is an extreme example. But logistical constraints mean some gas producers in the U.S. already effectively take a loss on their gas. Last year, over a third of North Dakota's gas outputwhich costs money to producewas burned off as production growth outpaced pipeline construction (the proportion flared nationwide is less than 1%).
The more likely scenario is that forced sales of gas push prices below $2, and perhaps even $1, for a brief period at some point this year. The real solution will be for such low prices to encourage more demand or, more immediately, for gas producers to shut-in some production, like Chesapeake Energy did last week. Citigroup puts the breaking point for high-cost producers at about $1.80, 27% below today's price. Ultimately, a crash may be the only way to get this market to rebalance in short order.
Write to Liam Denning at liam.denning@wsj.com WillWWasdasdasasdasdzxcxzcx
Natural-gas prices are on the floor. Could they go negative?
The overhang of excess natural-gas supply could crash prices even further this spring. Liam Denning discusses on The News Hub with Simon Constable and Bob O'Brien. Photo: Reuters
The probability that wholesale gas prices will drop below $2 per million British thermal units, from today's almost $2.50, is rising. Gas hasn't closed below $2 since September 2009. Today's market shares one critical similarity to then: bulging gas inventories. This overhang of excess supply could crash prices even further this spring.
Like squirrels with nuts, we humans store gas during the summer and then deplete those inventories in the winter. But this winter has been mild and comes amid rising gas production. The latest official figures, released Thursday, show the U.S. has about three trillion cubic feet of stored gas, up 25% from this time last year and the five-year average.
Barring a sudden chill, we will enter summer with gas inventories well above normal. This is a problem because storage operators often need to cycle gas through a facility on a seasonal basis to maintain operational efficiency. Companies that leave gas in storage beyond their contracted time usually risk stiff financial penalties. Morgan Stanley forecasts there will be 2.2 trillion cubic feet of gas in storage at the end of March, which is traditionally when we start refilling inventories. However, that level is very close to the 2.3 trillion cubic feet level at which, Morgan Stanley estimates, storage operators start forcing clients to take gas out.
This carries big risks for prices. BofA Merrill Lynch points out that back in 2009, when capacity limits were again being tested, gas prices almost halved in the space of a month between early August and early September.
But there have been even more extreme instances. In the U.K., for example, gas prices very briefly turned negative in October 2006, after a new pipeline from Norway flooded the market when storage capacity was nearly full already. Rather than pay penalties for causing imbalances in the system through excess gas, some traders preferred to simply pay someone else to take delivery.
[NATGAS] Bloomberg News
Companies that leave gas in storage beyond their contracted time risk stiff financial penalties. Above, a drilling rig sits on a natural gas pad in Pennsylvania.
That is an extreme example. But logistical constraints mean some gas producers in the U.S. already effectively take a loss on their gas. Last year, over a third of North Dakota's gas outputwhich costs money to producewas burned off as production growth outpaced pipeline construction (the proportion flared nationwide is less than 1%).
The more likely scenario is that forced sales of gas push prices below $2, and perhaps even $1, for a brief period at some point this year. The real solution will be for such low prices to encourage more demand or, more immediately, for gas producers to shut-in some production, like Chesapeake Energy did last week. Citigroup puts the breaking point for high-cost producers at about $1.80, 27% below today's price. Ultimately, a crash may be the only way to get this market to rebalance in short order.
Write to Liam Denning at liam.denning@wsj.com WillWWasdasdasasdasdzxcxzcx
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