Energy Content And Economics
The British Thermal Unit (btu) equivalent of one barrel of oil equals six thousand cubic feet of natural gas. Therefore if gas at $3.00 per mcf were to be at energy parity with oil, then oil would sell for $18.00. But WTI sells at $90 bbl. So gas must get more expensive or oil will get cheaper. As the gas rig count dwindles and evidence mounts that at least some of the shale plays are depleting much faster than projected, the result has been the aforementioned much lower than normal stockpile injection rates. With the disparity between oil and gas prices at such extremes, all available capital will continue to flow into drilling for gas liquids and oil. Some of the remaining dry gas drilling is probably just to maintain lease rights. Newton’s 3rd Law of Thermodynamics says for every action there is an equal and opposite reaction. Natural Gas at $13.28 is too high and the April price of $1.89 is too low. The rubber band is becoming stretched in the direction of tight supply. It’s too cheap to drill for, so supplies will further dwindle until inexorably the shortage occurs and prices spike irrationally higher. That time is sooner than later.
We had an abnormally warm 2011-12 winter season in the US which sank home heating gas demand to extremely low levels. Was it because of an El Nino effect or did global warming play the pivotal role? Or, most likely, it is a confluence of several factors. Whatever the cause, the jet streams carrying the traditional cold temperatures and accompanying snowstorms didn’t reach south as far and as often as usual. Conversely, Europe had an abnormally cold winter last season suggested causes being the abstruse North Atlantic Oscillation Index, low solar activity and attendant low sunspot numbers and associated solar magnetic flux. You understand, right.
Natural Gas prices have spent all of 2012 below $3.00. Just the past three trading days, perhaps starting to reflect the fundamentals discussed herein, have seen spot prices nudge above the $3.00 level. So combine 13 year low gas rig counts, declining production levels with resultant ultralow storage injections, shut in gas production, faster than anticipated shale well declines, persistent switching from oil and coal to cheaper and cleaner gas alternatives…..Then consider unending hotter than normal summer temperatures, continued greater than normal nuclear plant outages, a hurricane or two that knocks out Gulf of Mexico natural gas production for a week or two, and a La Nina induced cold winter…….any one of these can light the fuse that pushes the tenuous supply/demand balance into cardiac arrest. That’s the chain and it’s going to lead us to $8.00 mcf natural gas by the approaching winter.