Thursday, July 9, 2009

Gloom and Doom?

I read an interesting article from the Canadian Financial Post that talks about the supply issues concerning natural gas in North America. It gave a good primer on the supply situation but was pretty gloomy on the whole, hitting on concepts such as the abundance of shale gas, the high current levels of gas storage and the expected wave of LNG bound for our shores. It also notes that the pricing ratio between natgas and oil is around 20 times, which is considerably higher than the traditional 6x, a disconnect that some analysts will remain disjointed for a while.

I agree that the supply dynamics are way out of whack right now, but as I noted yesterday, I think the long-term story is that the newfound abundance of natural gas can be a positive for the gas industry and the nation as a whole. I'm no economist, but the large and reliable supply of gas should lead to a somewhat steadier level of pricing going forward. One of the great shocks to the supply side in recent years was Hurricane Katrina, which shut in lots of offshore gas production and sent gas prices spiking to $15/MMBtu four years ago. With abundant gas from more reliable terrestrial sources, you are less likely to see this kind of shock in the future.

To me it gives potential users (switching from coal and oil) a signal that there is a reliable supply that is less prone to drastic price swings. As a traded commodity, the price of natural gas will always fluctuate, but a higher level of predictability should lead to greater acceptance on the demand side.

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