Tuesday, December 29, 2009

[Top 10] #3: Gas Price Gyrations

Watching the rise and fall of gas prices has been a dizzying experience. I closely follow the Henry Hub spot price as a barometer of the short-term market value of natural gas and because it fairly closely mimics prices one might see on a royalty check.

After peaking over $13/MMBtu last year, prices slid for the rest of 2008. The slide continued in 2009 as demand flagged in a recessionary environment. The combination of higher production from shale wells and decreased consumption caused gas in storage to swell well beyond previous records. The belief that storage might be exceeded was one of the main causes for prices to sink throughout the year. The spot price dipped as low as $1.88/MMBtu at the beginning of September before recovering to the upper $5’s in December, approximately where it started the year. Year end statistics might show a +/- 5-10% change in price, but that will be no indication of the price volatility or how close the price came to scraping bottom.

Beyond the impact to a land owner’s pocketbook, commodity price volatility is not good for natural gas. If the industry wants to convince prospective users of the benefits to switch to gas, price volatility is a huge negative.

The price outlook going forward is not great. Most analysts don’t expect gas to exceed $6.50 to $7.00/MMBtu for the next decade because of the growth in available supply. Because of the number of shale wells being drilled, oversupply will continue until there is a major change in consumption patterns.

One of the big discussions this year was at what point are shale wells economically feasible? If commodity prices remain low for a few years, we are going to find out.

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