Monday, January 16, 2012

Natural gas bubble?

Natural gas has fallen 32 percent in the last year and now trades below $3 mBTU. Cold weather this week-end will not help the market. The hort-term demand of turning up the thermostat will not solve the problem.

Pricing moving to the marginal cost will not help the market either. Even with price at marginal cost, there are other liquids coming out of the gas wells as the by-product sales make pumping still profitable. Rig counts are down but each rig is able to get more through advanced drilling techniques. Production in the US is at all time highs and foreign companies want into the US market. There is just no place to put the gas. 

Demand will increase but not quickly enough. LNG is a possible but there will be a fight as industrial companies who like cheap gas do not want to see this production input move into the global market. The only way this problem can be solved if there are companies which go out of business and there is market rationalization. This has the marks of  a bubble. 

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