Natural gas price plummets

Tuesday , March 18, 2014 - 1:10 PM

Tom Mast

CAPER, Wyo. -- An unusually mild winter and big inventories conspired to help drive down natural gas prices in recent months, even as the oil market tightened among speculation and ongoing demand from booming economies elsewhere in the world.

The U.S. Energy Information Administration says the winter of 2011-2012 was warmer than normal across most of the U.S. National population-weighted heating degree days were down between 13 to 36 percent when compared to monthly historical normal from November through March.

This reduced the estimated, average residential and commercial natural gas demand by more than 6 billion cubic feet per day compared to the previous five-year average.

The relative warmth also reduced the need to pull natural gas from underground storage. Storage levels for natural gas were 2,479 billion cubic feet for the week ending March 30, which was more than 60 percent higher than the five-year average for that week.

On March 31, considered the end of the heating season, the spot price of natural gas at the Henry Hub was $2.02/MMBtu, down from $3/MMBtu at the beginning of the year.

Jim Robinson, senior economist with the state Economic Analysis Division, said gas shale plays in various parts of the U.S. and new technology have contributed to plentiful supplies of natural gas.

"We now have this fracking technology and horizontal drilling," he said. "That's really opened up a lot of access to natural gas that we just didn't have four or five years ago."

One positive has been that low prices are beginning to stimulate new demand for natural gas as industries switch from other fuels, Robinson noted.

Demand in the power sector was up 17 percent this winter compared to last and almost double the average daily demand witnessed in the winter of 2005-2006, according to EIA estimates.

But a bigger boost could come a few years from now as the U.S. begins to export large quantities of natural gas.

"In the Gulf of Mexico, they were building ports that would actually import natural gas a couple years ago because we thought we were going to have a shortage," Robinson said. "And now those same facilities are going to be constructed in such a way that they will export gas instead of importing."

Robinson said low prices have crippled activities related to so-called "dry" gas, or gas that occurs without condensate or liquid hydrocarbons.

On the other hand, "wet" gas - of which Wyoming has abundant supplies - continues to yield valuable products. Robinson said that's one reason the drop in natural gas prices so far has not had a dramatic impact on oil and gas drilling employment.

Another is that companies that are involved in both oil and gas have switched their exploration emphasis to oil.

As natural gas prices plunged, crude oil prices remained relatively high at around $100 per barrel through first quarter 2012.

The ratio between the spot price of crude oil and natural gas has generally increased since January 2009, but has accelerated in recent months.

This was due to the increasing price of crude oil and the falling price of natural gas.

In terms of production implications, a higher oil-to-natural gas ratio encourages drilling for oil in preference to natural gas, according to an EIA analysis.

A higher ratio also encourages end users to choose natural gas products over products derived from crude oil, like distillate and residual fuel oil.

Robinson said one big difference between crude oil and natural gas is that oil's an international market and so the price basically is determined globally.

Natural gas is not an international player in the same way. So while gas prices are high in Europe, they may be low in the U.S. At the moment, domestic producers have no way to export natural gas to more lucrative global markets.

Robinson added that the supply and demand for oil in the U.S. is very tight. Between what the U.S. produces and imports, it pretty much consumes the entire supply. As a result, big inventories don't build up.

Strong demand for oil also continues in growing economies like China and India, which has helped support the price.

In addition, Rod De Bruin with the Wyoming State Geological Survey said speculation has kept oil prices artificially high.

"I don't think there's a good reason for it to be as high as it is," he said.

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