- Natural gas prices look towards better days
Natural gas prices have staged an impressive recovery, up nearly 30% this month to approximately $4.50 even though inventories remain near highs and industrial demand is down due to a deep recession. Some suggestions were that the main reason for the increase in prices this month was due to the United States Natural Gas Fund. However, some industry analysts believe this suggestion has been dramatically overstated. Though the fund may have contributed to appreciating prices, many point out that other factors have played their part and point out that total volume and open interest in natural gas futures are up sharply this month, and have broken through some key technical resistance points.
There seems to be some concensus in the market from analysts and industry players that prices will settle in between $6.00 to $8.00 by the end of the year. Back in mid March, a Bloomberg News survey of 20 analysts, natural gas prices will rise to US$7 per million British thermal units by January.
Just this week, Canadian Natural Resources Ltd. – the second-largest natural-gas producer in Canada – plans to drill 50% fewer gas wells this year than it did last year due to low prices for natural gas. In a recent interview, Steve Laut, Canadian Natural’s President and COO, stated the company drilled 280 natural gas wells in 2008. It has drilled 70 in the first quarter of 2009, and will only drill another 70 more this year. However, he added that the Company would ramp up drilling activity once prices stabilize about US$6 per million British thermal units and offered his own prediction that gas would settle between US$6-US$8 in early 2010.
At some point the decline in exploration, and the shutting in of existing production will start to impact the market. As stated here in the Horn River News an important lesson is that supply falls faster then demand when supplies are no longer being replenished at an appropriate rate. It is at this point that prices see strong appreciation, and acts as a catalyst for bringing production back on stream and ramping up drilling. Unfortunately, neither production being turned on or drilling activity happens over night.
Lastly, whether you believe we are seeing “green sprouts” or dandelions, the fact remains when the economy does start to turn to the positive industrial demand will begin to increase. If this increase – regardless of how big – occurs at the same time that supplies decline the price then will experience a significant potential spike. So the general consesus would seem to point towards $7.00 for natural gas.
It is for these very reasons that many industry players have been positioning themselves for the next energy cycle. As reported in Financial Post’s article The next big thing:
The resource play movement, however, is not only continuing, but changing the business. Outside the oil sands, of which all the good reserves are already owned, the biggest incremental supplies of the next cycle are expected to come from resource plays — oil and particularly shale gas –by using drilling advancements.
As the only natural gas play that has maintained or increased its level of activity, it would seem all roads are leading to the Horn River basin as the place industry players are positioning themselves for the next cycle.