Thursday, August 14, 2008

The Big Story vs. The Big Picture

The two stories of natural gas oversupply and recently efficiencies leading to lower energy demand are getting lots of traction in the media, from newspapers to blogs. The recent price declines in natural gas (Henry Hub spot price was $8.10 at yesterday's close) and oil (about $114 right now) are certainly help drive the stories. But it is important when reading The Big Story to keep in mind The Big Picture.

I'm no prognosticator, but it's interesting to see the stories evolve as various media outlets pick them up and then beat them to death. I think there is a lot of overreaction going on here. As I've noted before, there is speculation that LNG imports will pick up again this year (although prices in Europe are significantly higher than in the US, thus making Europe a more attractive market) and smash gas prices in the US. There is also discussion that current exports to Mexico and Canada are artificially supporting the consumption (and therefore the price) of natural gas. There are many other ingredients suggesting depressed gas prices.

With all of the sudden doom and gloom, it's easy to overlook the long term situation: domestic natural gas is relatively clean (certainly in comparison to coal), relatively cheap (especially compared to oil) and absolutely NOT FROM THE MIDDLE EAST OR RUSSIA. Short term price changes are largely created by traders who profit from changing prices, either up or down. Traders do not change the ultimate fundamentals of a commodity, which in my opinion remain strong. Big decisions are being made today and in the near future that will lead to multi-billion dollar investments (building power plants, investing in natural gas technology for cars (maybe), etc.) that will drive the long term demand for gas. While recently plummeting gas prices are depressing to those who are involved in the Haynesville Play, it is important to keep in mind that the long term fundamentals remain strong.

No comments: