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Monday, 11 April 2016

Natural Gas Rises as Investors Bet on a Bottom

LONG  OVERDUE REVERSION TO MEAN 

 That should result in a return to higher gas prices. The price estimate based on comparative inventory (shown in red) is more bullish than EIA’s price forecast (shown in orange) but both indicate a substantial percentage increase in prices.
EIA forecasts $3.20 gas prices in January and February 2016, and $3.41 in December 2017. My forecast based on comparative inventories is about 15% higher overall than EIA’s but peak prices are 20-30% higher.  It calls for winter prices in the $4-range for 2016 and 2017.
FORBES

ALERT: Natural Gas Prices Positioned for Huge Jump


Natural gas prices should double over the next year. 

Over-supply plus a warm 2015-2016 winter have resulted in low gas prices. That is about to change because supply is decreasing (Figure 1).

Supply Balance_STEO_JAN 2016 Natural Gas 24 Jan 2016


Figure 1. EIA U.S. natural gas supply balance and forecast. Production, consumption and supply balance values are 12-month moving averages. Source: EIA and Labyrinth Consulting Services, Inc.
Total supply–dry gas production plus net imports–has been declining since October 2015* because gas production is flat, imports are decreasing and exports are increasing. Shale gas production has stopped growing and conventional gas has been declining for the past 15 years. As a result, the supply surplus that has existed since December 2014 is disappearing and will move into deficit by November 2016 according to data in the EIA March STEO (Short Term Energy Outlook) .
During the last supply deficit from December 2012 to November 2014, Henry Hub spot prices averaged $4.05 per mmBtu. Prices averaged $1.99 per mmBtu in the first quarter of 2016 so it is reasonable that prices may double during the next period of deficit.
EIA forecasts that gas prices will increase to $3.31 by the end of 2017 but that is overly conservative because it assumes an immediate and improbable return to production growth once the supply deficit and higher prices are established (Figure 1).
Production companies are in financial distress and are unlikely to return to gas drilling at the $2.75 price that EIA forecasts for November 2016. The oil-field service industry is in disarray and is probably unable to reassemble drilling and fracking crews and equipment in less than 6 to 12 months after demand resumes.
There are currently on 92 rigs drilling for gas. That is 150 rigs less than the previous record-low set in 1992 (Figure 2). Production cannot be maintained at this level despite unrealistic faith in drilling efficiency and spare capacity from uncompleted wells.

Gas Directed Rig Count



Figure 2. U.S. gas-directed rig count, 1987-2016. Source: Baker Hughes and Labyrinth Consulting Services, Inc. 

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Here’s why the markets may be 


decoupling from oil


oil trains





Well, this is a bit of a disappointment. We have oil flying (up nearly 7 percent!), we have a weak dollar, we have China quiet all week, and we have a dovish Fed that traders believe have put some kind of floor under the market. And this is all we get? The Dow Industrials up 40 points in a lackluster, average-volume session? In the past months, if oil would be up 7 percent and the dollar would be weak, we would have been up 200-250 points. What’s wrong? You can argue oil may be decoupling from the markets. Maybe. But the usual suspects that would benefit from a weak dollar are all up: energy, materials, industrials. In fact, there’s more than four stocks advancing for every one declining. So, why the crummy point action? I think the problem is that the “V” rally is over. Remember, we dropped big […]




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