Comments on: Natural Gas Is Going to 1997 Levels and is Going to Stay There for A While http://www.thebarricadeblog.com/?p=837 Contrarian Grapeshot for a Teetering World Mon, 06 Sep 2010 09:41:00 +0000 http://wordpress.org/?v=2.7.1 hourly 1 By: AGY http://www.thebarricadeblog.com/?p=837&cpage=1#comment-2185 AGY Sun, 07 Jun 2009 20:01:46 +0000 http://www.thebarricadeblog.com/?p=837#comment-2185 Anon: Relying on correlation is charlatanism--or have you forgot the wreckage wrought by reliance on the Gaussian copula function in correlating risk of default when packaging CDO's? The fundamentals are much different between now and the 1930s. For one thing, the market for NG was tiny then, and most of it was just flared off. There is a mini-bubble building in commodities and it will burst. David Rosenberg yesterday: "The key issue is the differential between absolute and relative price increases: in many ways the current inflation scare is even less moot than the panic in the summer of last year, when it became painfully obvious that neither retailers nor final-state manufacturers have pricing power (think excess capacity: if the manufacturing ISM is any indication, this pricing power is only going to get further obliterated in the coming months, eating away directly at the bottom line, and making the forward EPS ramp up even more of a mirage in the manufacturing sector; also worth pointing out that non-manufacturing ISM actually fell by 2.6% to 44.4%). Anon:
Relying on correlation is charlatanism–or have you forgot the wreckage wrought by reliance on the Gaussian copula function in correlating risk of default when packaging CDO’s? The fundamentals are much different between now and the 1930s. For one thing, the market for NG was tiny then, and most of it was just flared off. There is a mini-bubble building in commodities and it will burst.

David Rosenberg yesterday: “The key issue is the differential between absolute and relative price increases: in many ways the current inflation scare is even less moot than the panic in the summer of last year, when it became painfully obvious that neither retailers nor final-state manufacturers have pricing power (think excess capacity: if the manufacturing ISM is any indication, this pricing power is only going to get further obliterated in the coming months, eating away directly at the bottom line, and making the forward EPS ramp up even more of a mirage in the manufacturing sector; also worth pointing out that non-manufacturing ISM actually fell by 2.6% to 44.4%).

]]> By: AN http://www.thebarricadeblog.com/?p=837&cpage=1#comment-2176 AN Tue, 02 Jun 2009 06:55:04 +0000 http://www.thebarricadeblog.com/?p=837#comment-2176 "The fate of NG prices is just a manifestation of the credit-bubble blow-back. A look at almost all other asset classes shows them returning to 1997-1998 levels, adjusted for inflation. The S&P 500, at present writing, is at about 1998 levels, and real estate, though widely varied across the country, is at about 2002 levels..." Rather than comparing nat gas with stocks and property, would it not be more valid to compare it with other commodities. Tell me, what was the price of gold in 1998, or wheat or steel or dare I say even oil. Commodity and stock prices are inversely correlated, so to suggest nat gas prices should fall because stocks have also is misleading. The longest bull market in commodities began in the middle of the Great Depression in the 1930s. And we all know how the stock market looked back then.... “The fate of NG prices is just a manifestation of the credit-bubble blow-back. A look at almost all other asset classes shows them returning to 1997-1998 levels, adjusted for inflation. The S&P 500, at present writing, is at about 1998 levels, and real estate, though widely varied across the country, is at about 2002 levels…”

Rather than comparing nat gas with stocks and property, would it not be more valid to compare it with other commodities. Tell me, what was the price of gold in 1998, or wheat or steel or dare I say even oil. Commodity and stock prices are inversely correlated, so to suggest nat gas prices should fall because stocks have also is misleading. The longest bull market in commodities began in the middle of the Great Depression in the 1930s. And we all know how the stock market looked back then….

]]> By: AN http://www.thebarricadeblog.com/?p=837&cpage=1#comment-2175 AN Tue, 02 Jun 2009 06:31:21 +0000 http://www.thebarricadeblog.com/?p=837#comment-2175 Interesting stuff and your warning against looking purely at the rig count as a means to pick a bottom in nat gas prices is a valid one. However, your analysis of demand (or lack of) seems to focus on the US to exception the rest of the world. Yes, as the world's biggest energy consumer, the US does exert a huge influence on the global demand-supply picture. But aren't you forgetting a little country called China, which will be the main driver of global economic in the 20 years and has a string of LNG storage facilities coming on stream along its east coast from 2010 onwards. Interesting stuff and your warning against looking purely at the rig count as a means to pick a bottom in nat gas prices is a valid one. However, your analysis of demand (or lack of) seems to focus on the US to exception the rest of the world. Yes, as the world’s biggest energy consumer, the US does exert a huge influence on the global demand-supply picture. But aren’t you forgetting a little country called China, which will be the main driver of global economic in the 20 years and has a string of LNG storage facilities coming on stream along its east coast from 2010 onwards.

]]> By: Urgergoaccort http://www.thebarricadeblog.com/?p=837&cpage=1#comment-364 Urgergoaccort Wed, 20 May 2009 23:19:38 +0000 http://www.thebarricadeblog.com/?p=837#comment-364 Terrific web site:D Hope to visit once again:D Terrific web site:D Hope to visit once again:D

]]> By: Arianarolo http://www.thebarricadeblog.com/?p=837&cpage=1#comment-356 Arianarolo Wed, 13 May 2009 14:52:51 +0000 http://www.thebarricadeblog.com/?p=837#comment-356 Thanks for good post Thanks for good post

]]> By: Drumbeat: April 25, 2009 | The Oil Report http://www.thebarricadeblog.com/?p=837&cpage=1#comment-349 Drumbeat: April 25, 2009 | The Oil Report Fri, 08 May 2009 05:19:29 +0000 http://www.thebarricadeblog.com/?p=837#comment-349 [...] Natural Gas Is Going to 1997 Levels and is Going to Stay There for A While In the middle of this decade, E&P companies were spurred on by rising commodity prices and easy credit to find and develop new sources of domestic natural gas–most notably shale gas. The forces that enabled this phenomenal growth in domestic gas production–the great asset and credit bubble–have vanished into air, into thin air. Now, Shale-gas companies may have been impaled on their own bayonets. Yet some would have us believe that natural gas prices are poised for a great comeback–that all the fret and worry is for nothing because prices are going to come right back up and justify the development of all the shale in the country, and then some. They are wrong: demand will continue to be weak and supply will not be nearly as sparse as the some of the gas-bulls would have us believe. Instead, the story of 2009, 2010, and beyond will be not only how much farther natural gas prices will fall, but also how long prices will stay in the basement, and who will be counted among the casualties. [...] [...] Natural Gas Is Going to 1997 Levels and is Going to Stay There for A While In the middle of this decade, E&P companies were spurred on by rising commodity prices and easy credit to find and develop new sources of domestic natural gas–most notably shale gas. The forces that enabled this phenomenal growth in domestic gas production–the great asset and credit bubble–have vanished into air, into thin air. Now, Shale-gas companies may have been impaled on their own bayonets. Yet some would have us believe that natural gas prices are poised for a great comeback–that all the fret and worry is for nothing because prices are going to come right back up and justify the development of all the shale in the country, and then some. They are wrong: demand will continue to be weak and supply will not be nearly as sparse as the some of the gas-bulls would have us believe. Instead, the story of 2009, 2010, and beyond will be not only how much farther natural gas prices will fall, but also how long prices will stay in the basement, and who will be counted among the casualties. [...]

]]> By: Brett Owens http://www.thebarricadeblog.com/?p=837&cpage=1#comment-318 Brett Owens Wed, 29 Apr 2009 00:37:06 +0000 http://www.thebarricadeblog.com/?p=837#comment-318 I enjoyed your piece, thanks for pointing it out. Can you expand upon why shut-ins would raise the price to just above the marginal cost of production? I could see that being the case if setup was easy, but I don't think it's that simple just to drill a little more when prices start to move up. Supply tends to lag price quite a bit in this market. I enjoyed your piece, thanks for pointing it out. Can you expand upon why shut-ins would raise the price to just above the marginal cost of production? I could see that being the case if setup was easy, but I don’t think it’s that simple just to drill a little more when prices start to move up. Supply tends to lag price quite a bit in this market.

]]> By: TJS http://www.thebarricadeblog.com/?p=837&cpage=1#comment-316 TJS Tue, 28 Apr 2009 17:23:15 +0000 http://www.thebarricadeblog.com/?p=837#comment-316 Interesting and thorough analysis. As someone who works in the power industry, I can tell you that there aren't many power plants that can switch between coal and NG. However, plenty of utilities and many merchant generators have NG fired plants. If the NG price falls below the price of coal, look for the power plants to maintain demand at just under that break-even point. Two major wildcards that don't seem to be addressed in this post: 1) Carbon tax or Carbon Cap-n-Trade. Depending upon if, and how, this is passed, look for the US government to tax the cost of using fossil fuels. Coal will certainly have a higher carbon tax than NG. How much? It's hard to predict. However, almost overnight, this could make the NG more economical than coal for power producers. Generally, the gas plants sit idle and generate power during peak power consumption periods. That idle capacity can be started at any time. 2) T. Boone Pickens efforts via the Pickens Plan. While most people think of Pickens efforts around wind, he is also a big proponent of using NG as a fuel for vehicles (most major trucks). As Pickens suggests, we don't have the technology to make a battery-powered 18-wheeler. Again, to make this have an material effect anytime soon, the government will have to intervene, but Pickens has deep pockets and a large group of supporters, so don't count it out. Pickens option becomes even more attractive as NG prices become lower. Obama is set on energy independence and I think Pickens Plan represents the best way to wean the US off the use of oil (which also happens to burn dirtier). Interesting and thorough analysis. As someone who works in the power industry, I can tell you that there aren’t many power plants that can switch between coal and NG. However, plenty of utilities and many merchant generators have NG fired plants. If the NG price falls below the price of coal, look for the power plants to maintain demand at just under that break-even point.

Two major wildcards that don’t seem to be addressed in this post:
1) Carbon tax or Carbon Cap-n-Trade. Depending upon if, and how, this is passed, look for the US government to tax the cost of using fossil fuels. Coal will certainly have a higher carbon tax than NG. How much? It’s hard to predict. However, almost overnight, this could make the NG more economical than coal for power producers. Generally, the gas plants sit idle and generate power during peak power consumption periods. That idle capacity can be started at any time.
2) T. Boone Pickens efforts via the Pickens Plan. While most people think of Pickens efforts around wind, he is also a big proponent of using NG as a fuel for vehicles (most major trucks). As Pickens suggests, we don’t have the technology to make a battery-powered 18-wheeler. Again, to make this have an material effect anytime soon, the government will have to intervene, but Pickens has deep pockets and a large group of supporters, so don’t count it out. Pickens option becomes even more attractive as NG prices become lower. Obama is set on energy independence and I think Pickens Plan represents the best way to wean the US off the use of oil (which also happens to burn dirtier).

]]> By: Drumbeat: April 25, 2009 | Bear Market Investments http://www.thebarricadeblog.com/?p=837&cpage=1#comment-313 Drumbeat: April 25, 2009 | Bear Market Investments Tue, 28 Apr 2009 15:38:16 +0000 http://www.thebarricadeblog.com/?p=837#comment-313 [...] Natural Gas Is Going to 1997 Levels and is Going to Stay There for A While In the middle of this decade, E&P companies were spurred on by rising commodity prices and easy credit to find and develop new sources of domestic natural gas–most notably shale gas. The forces that enabled this phenomenal growth in domestic gas production–the great asset and credit bubble–have vanished into air, into thin air. Now, Shale-gas companies may have been impaled on their own bayonets. Yet some would have us believe that natural gas prices are poised for a great comeback–that all the fret and worry is for nothing because prices are going to come right back up and justify the development of all the shale in the country, and then some. They are wrong: demand will continue to be weak and supply will not be nearly as sparse as the some of the gas-bulls would have us believe. Instead, the story of 2009, 2010, and beyond will be not only how much farther natural gas prices will fall, but also how long prices will stay in the basement, and who will be counted among the casualties. [...] [...] Natural Gas Is Going to 1997 Levels and is Going to Stay There for A While In the middle of this decade, E&P companies were spurred on by rising commodity prices and easy credit to find and develop new sources of domestic natural gas–most notably shale gas. The forces that enabled this phenomenal growth in domestic gas production–the great asset and credit bubble–have vanished into air, into thin air. Now, Shale-gas companies may have been impaled on their own bayonets. Yet some would have us believe that natural gas prices are poised for a great comeback–that all the fret and worry is for nothing because prices are going to come right back up and justify the development of all the shale in the country, and then some. They are wrong: demand will continue to be weak and supply will not be nearly as sparse as the some of the gas-bulls would have us believe. Instead, the story of 2009, 2010, and beyond will be not only how much farther natural gas prices will fall, but also how long prices will stay in the basement, and who will be counted among the casualties. [...]

]]> By: AGY http://www.thebarricadeblog.com/?p=837&cpage=1#comment-309 AGY Tue, 28 Apr 2009 11:54:17 +0000 http://www.thebarricadeblog.com/?p=837#comment-309 Mike, thanks for the comment. RE costs to compress/transport/expand, that does not compute in the LNG producers cost so it will not discourage them from shipping here. RE "that gas pays off the well simply says the well is economic, as is true of most wells," are you talking about liquids? That's what I was talking about (perhaps poorly). Your point re actual and potential production is well taken, and I aver that the cheaper the potential production is, the more it will push out more expensive domestic production. Thanks again for reading, your thought are appreciated. Mike, thanks for the comment. RE costs to compress/transport/expand, that does not compute in the LNG producers cost so it will not discourage them from shipping here. RE “that gas pays off the well simply says the well is economic, as is true of most wells,” are you talking about liquids? That’s what I was talking about (perhaps poorly). Your point re actual and potential production is well taken, and I aver that the cheaper the potential production is, the more it will push out more expensive domestic production. Thanks again for reading, your thought are appreciated.

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