Natural Gas Market Collapse

On Thursday, natural gas prices fell by nearly 6% to $2.945.  The break in gas prices below the key $3 per Mcf threshold puts them now at a seven-year low.  The price break was helped by another injection into storage of 52 Bcf.  This week's injection was below Wall Street's consensus anticipated 58 Bcf injection estimate, so it should have been a positive for gas prices.  However, projections are now calling for total storage volumes of 3.9 Tcf to be reached before the end of the injection season in nine weeks.  At that point, gas will need to be either shut in or sold for whatever the market will pay, a much lower price most likely.

We heard, however, from one trading desk in Houston yesterday that they had gas storage volumes rejected by the facility forcing them to flare the gas.  While the amount of gas burned was quite small, roughly $50,000 worth, it highlights a problem the market is beginning to face - inadequate storage capacity at times - and will face when storage is full.  Another article we read today pointed out that due to a lack of pipeline capacity in North Dakota, home of the Bakken oil play, a significant amount of natural gas produced in association with Bakken oil was burned, again reflecting the physical challenges within the national gas market.  

Some producers are beginning to acknowledge they are now facing market prices below their finding and development costs for new natural gas.  At the same time, drilling for natural gas continues to recover from the earlier industry collapse, after having fallen in half from last summer, but we suspect that many of the gas-oriented rigs are drilling to hold leases producers might lose otherwise.  Other producers are arguing that the fact gas production volumes are still holding level in the face of the drilling collapse is due to producers working through a backlog of wells previously drilled but not completed.  That backlog of drilled but uncompleted wells is shrinking suggesting to some that when the backlog is exhausted, natural gas production volumes will collapse rapidly.  Perhaps that is what is behind the rumoured large futures position in early 2010 gas taken by a hedge fund betting on $10 per Mcf gas prices.  If their bet proves correct, watch out for rapid government intervention in the market to exorcise speculators and seize greater control over the use of gas in this country.