I’ve noticed that natural gas future has been in full bear market for the past year. The price has been down from a high of 11.00 to recent 3.6! What would be the main cause for this? I suspect shale gas plays a big part of it! How low could this go? It can’t just go to near ZERO since this is a commodity!
Some commodities are hot, and others, well, are not. Sometimes the reasons are obvious and sometimes they are not. In the case of the weak natural gas market, the reason for its weakness is fairly obvious.
Nymex natural gas never looked weaker at the end of last week. Analysts at The Schork Report changed their technical bias to bearish on August 6th. Since then, the spot contract for November delivery has closed lower in 24 of 39 sessions (62%) with an average loss of $0.07 per dekatherm, per session.
The above reality flies in the face of what is happening – a strong demand for natural gas in this age of energy transformation. Natural gas is a relatively efficient, clean burning alternative to oil, and there is a global demand for the commodity, especially in the winter months. Historically, natural gas has been difficult and costly to extract, which created a supply issue. The excerpt below points to this reality.
Natural gas wells normally produce at their highest rates as soon as they are put into production. Over time, the gas flow rates decrease until the revenue stream from the gas production is less than the cost required to maintain production. This is when the wells are shut in or abandoned.
One would think the above would reduce supply and drive the price up, and it has in the past, but today’s supply and demand equation is different from what it was even two years ago. Enter stage left, shale gas.
The reason is shale gas — a new and abundant source of natural gas, trapped in rock formations. Oil companies have known about it for decades but always dismissed it because it was too expensive and difficult to extract. In the past few years, new technologies that pump water underground to fracture the rock and free the gas have been perfected. The breakthrough has opened a new frontier for the energy industry and turned long-held assumptions about the world’s dwindling supplies on their head.
Can it go to “near” zero? Hardly, since a seasonal demand exists and a growing appetite for the commodity exists in China, India, and other emerging economies. Can it go lower? Absolutely, especially if shale gas continues flowing in unprecedented volumes.
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