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Natural Gas Hole Deepens

Prices Continue to Plummet as Production Nears Capacity

Written by Stephanie Ginter
Posted April 10, 2012

The natural gas industry skyrocketed after drilling companies discovered how to access natural gas locked in shale formations over five years ago.

Production has since increased 24 percent, but rate of consumption trails behind as natural gas prices come in at a 10-year low and are continuing to drop.

This past winter was among the top five warmest in the last 117 years, driving natural gas demand into the ground.

If rate of production isn't met with an increased demand this summer, storage facilities could top out by the fall. Once facilities exceed maximum capacity, natural gas prices could plummet to less than $1.

The number of natural gas rigs has fallen by 30 percent to 658 with many of them disappearing in the Haynesville Shale in Northwestern Lousiana and East Texas and the Fayetteville Shale in Arkansas.

Meanwhile, the number of oil rigs in the U.S. is the highest it's been in over 25 years. On the upside, at least natural gas rig workers aren't adding to the unemployment rate and have simply been relocated to oil instead of gas rigs. On the downside, increased oil drilling is exacerbating the natural gas surplus as it is more often than not a byproduct of oil drilling.

While household consumption is down, dramatically low prices have sparked a surge in demand among industrial natural gas users like chemical, plastic, and fertilizer manufacturers. We're also seeing more and more natural gas powered commercial vehicles and electric power facilities switching to natural gas instead of coal.

Industry players' efforts to mop up the excess supply won't be enough to keep storage facilities from reaching maximum capacity this summer, especially with the predicted cooler-than-normal temperatures.

Not surprisingly, the worsening decline in natural gas prices has dragged stock prices down simultaneously, with several top U.S. natural gas producers, Chesapeake Energy (NYSE: CHK), Devon Energy (NYSE: DVN), ConocoPhillips (NYSE: COP), and Encana (NYSE: ECA), seeing shares plummet over 20 percent in the last twelve months. Chesapeake has even gone as far as to remove the majority of its oil and gas hedges for the remainder of this year and the next.

Natural gas futures fell 1.85 percent to $2.068 on the New York Mercantile Exchange mid-morning Tuesday.

That's all for now,

Stephanie


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