Front page article today in the WSJ “Glut Hits Natural Gas Prices”. With front month futures hitting $2.774/MMBtu (lowest front-month price since Sept. 2009, lowest winter since 2002), and Henry Hub cash at $2.808/MMbtu), the non-energy world is finally starting to absorb the magnitude of the shale overhang. Heck, this would have happened in 2010 and 2011 if weather had not saved the day. This year, no weather and no save.
Which begs the question: How low can you go? And the follow on – what will prevent the price from going lower?
First things first. Prices can go a lot lower. There are a lot of technical resistance levels that we’ll discuss here over the next few days. But from the perspective of fundamentals, there is a significant overhang of supply with little chance of a significant short term demand response. Production remains strong due to a myriad of factors: (a) producers are hedged at much higher prices, (b) producers with liquids rich gas can be profitable selling NGLs and essentially giving away the gas, (c) associated gas from crude oil production can also be a ‘throw away’ product at today’s crude prices, and (d) foreign investments in U.S. shale mostly include “carry” deals that require drilling and production with little or no consideration of price.
With no weather to speak of, one-handle prices (below $2.00/MMbtu) are not only possible, but likely in the upcoming months. Almost certainly on a sporadic basis. Possibly on a sustained basis.
So the second question. What will prevent price from going lower? The topic that always percolates to the top of the pile when gas prices get cheap is shut-in. Producers will simply shut their wells off until prices go back up, right?
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