Tuesday, July 3, 2012

Turn around or bear market rally in Natural Gas?


In early May, I alerted you about a possible ‘break-out’ in Natural Gas pricing under the title “Something Rotten is happening in the State of Gas”. After a brief pause, in June, this trend is now becoming more defined (see below on the 1 year chart).

Only a month ago, pundits were predicting gas below $2 per Mcf but now, for no clear reason the trend has changed and is moving up once again. Today the price reached $2.92 per Mcf. That is a nearly 50% increase from its low! Will this trend endure?
That is hard to say. Chart technicians may point out a break through above the most recent high of $2.47 which bodes well. However, a bit of Euro worries or a cool summer may change matters quickly. So, stay alert and Nibble, Nibble. Because over the long run, gas prices should at least equal the costs to produce it ($ 4.5 to $6.00 per mcf) - plain economics. 

Currently, natural qas liquids (NLG) prices have fallen sharply due to oversupply. However, over the past couple of years the attractive economics of drilling for 'wet gas' kept many gas producers going. This has now come to an end (temporarily?). In the meantime, total gas production has declined while demand from electricity generators,trucking companies and other gas consumers has risen. A complex witch's brew of factors that is difficult to disentangle. But for now, the balance seems to have shifted towards higher gas prices.

Once the North American gas market has been globalized we will revert back to world gas prices. To become part of the global gas market we will need new pipelines to the B.C.'s West Coast and the new Liquid Natural Gas (LNG)  facilities that are currently under construction near Kitimat and Prince Rupert for export to Asia.  Hopefully, by the time that all this is operational the global gas prices are still a lot higher than our local prices - but that is still 2 or 3 years away.

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