Well, look at that. Don’t pay attention to natural gas prices for a week or so (sick and catching up from being sick) and prices drop below $3.00/MMBtu. That’s both good news and bad news. How is that good news? Well, because it’s bad news. Let me explain.
Drilling has been picking up recently. That’s the natural reaction of the industry when prices rise. We got down to 404 total rigs in the U.S. in May of 2016 as a result of low prices, and we’re already up over 700 in the second week of February 2017 as a result of climbing prices. When drilling picks up we get more natural gas of course. More natural gas means lower prices. Lower prices means less drilling and fewer rigs. It’s a cycle that repeats itself constantly, with some extreme highs an some extreme lows.
The extreme highs and the extreme lows are bad for everyone. During the lows workers get laid off, royalty owners are paid less, and consumers get excited about paying a little less for their gas. During the extreme highs, workers go back to work, royalty owners get excited about bigger royalty checks and consumers hate looking at their monthly bills. What’s better is to have slow and steady growth or at least lower highs and higher lows.
The fact that natural gas prices couldn’t break $4.00/MMBtu means that we probably won’t see really high highs in the near future. If we don’t see really high highs, we won’t see a huge boom in drilling and development work. If we don’t see a boom, we won’t see an oversupply of natural gas. If we don’t see an oversupply we won’t see a bust. No high highs, no low lows.
What will probably happen with gas prices at or below $3.00/MMBtu is that producers will kill some of the short-term programs they have planned. That will bring less gas into the market in the near future, so we should see fewer new rigs, and maybe even fewer rigs overall. That would result in less production and bring prices back up.
What I expect to see in the near future is that we’ll have something of a hard cap at around $4.00/MMBtu. That cap will slowly climb due to population growth and liquefaction plants being completed. Because drillers will start new drilling programs over $3.00/MMBtu, and it doesn’t take a long time to get new wells online, by the time prices hit $4.00 we’ll be looking at an oversupply of gas. Drillers will stop new programs, supply will drop, prices will drop, but by the time prices get significantly below $3.00 everyone will start drilling again. Hopefully the boom/bust cycle of natural gas will be greatly shortened. The oil and gas industry is going to respond quickly to the market, instead of slowly like it used to.
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Seeking Alpha is predicting natural gas prices will be $3.50/MMBtu in the next 8-12 months. That’s a good healthy price for the industry.
The rest of February is going to be warmer than usual. Demand for natural gas is going to go way down. We’ll have more gas in storage than we expected.
Gas prices have stabilized at about $2.84/MMBtu. It will be interesting to see how prices change moving into the storage season.