Thursday, April 30, 2009

Natural Gas Consumption, Supply and Pricing

Southwestern Energy provided some interesting information about natural gas supply and demand in a recent investor presentation. I excerpted a few slides that I thought put the current industry slump in perspective. The first slide shows thirty years of gas consumption and how the supply component is balanced between U.S. drilling and LNG imports. It's nice to see that domestic drilling rather than foreign imports really drives the natural gas industry. This is something it is important for our leaders in Washington, top to bottom, to understand.

This next slide is equally telling. The chart showing electricity consumption has been at a 45 degree angle since 1990. I keep hearing that we as a nation are now different - no more McMansions and conservation is the name of the game. I think we need more than six months of data from an economic downturn to establish a real trend. Haven't we seen this before? Look at 2002 - does it look familiar? I sincerely hope we have turned the corner as a nation in terms of consumption. We are a ridiculous people with all of our excess and waste. But will there be any substantive change overnight? Gasoline prices have dropped from $4 to $2 and suddenly people are buying trucks instead of hybrids again. My point is that we are a nation bred on consumption with a yearning for excess. I think we're going to continue to use more power.

The slide below is interesting because it shows the cyclical nature of natural gas prices over the past decade compared to the rig count. Rigs have largely remained steady except in 2002 and 2008-9. Seeing the steep decline of both, it makes you realize that a trough is coming soon - the question is how much more blood will be spilled?

The final chart I thought was interesting compared oil and natural gas commodity prices since 1994. It shows that the price of gas is so much more volatile than that of oil if you don't consider the insane oil price run-up of last summer. The chart also shows that while gas is more volatile in price, oil and gas largely move together. Wall Street analysts focus on this too, as they constantly quote the differential in terms of a ratio. Note in the most recent entries how divergent oil and gas are right now. If history is any guide, something has got to give.

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