Get Ready for Gas Price Volatility

on June 26, 2013 at 2:00 PM

China's Main Share Index Falls After Tax Tripled On Stock Transactions

US natural gas prices could face rising volatility over the next several years as demand begins to catch up to the rapid supply growth of the last several years, according to Michael Zenker, Managing Director of Energy Research for SASCO Energy.

The huge wave of supply that hit the US market in less than a decade – with production growing by a third from 2006 through 2012 – preceded a commensurate rise in demand by several years, said Zenker at the New York Energy Week Oil and Gas Markets Perspectives Breakfast on Tuesday. “The demand side wasn’t really ready for that,” he said.

“Now we’re sitting here looking at an equivalent amount of demand coming to market in the next 6-7 years, and the question is whether producers will be ready for that,” Zenker said. “They’re waiting for the right price signals.”

Henry Hub natural gas prices have recovered off of the staggering lows – sub-$2.00 per million Btu – of last spring. Prices are now in the $3.50-$4.00/MMBtu range, which is high enough to engender some optimism, but still too low to prompt a rush back to gas, especially when compared with returns on liquids and oil.

As demand grows from new sources, such as LNG exports, prices will have to rise high enough to spur a return to more robust production growth, and temporary supply-demand mismatches during the adjustment period could lead to price volatility.

“There’s probably going to be more volatility in the next few years while we wait for prices to recover and trigger the need for new drilling,” Zenker said. “We’ve gone through that rapid production growth, we’re in the plateau phase, now comes the demand wave.”

“We’ll see some more fun times in natural gas prices,” Zenker said.

LNG Exports and Volatility

A report from consultancy PIRA, released yesterday, also foresees a period of price volatility in US gas markets. The report said that the start-up of LNG exports would add a measure of volatility to US natural gas prices, and as export capacity grew, so would volatility.

Zenker said that he expects another three to four projects – in addition to the two US LNG export projects already approved – granted licences this year for deliveries to non-free trade agreement countries, though he cast doubt on whether there is market appetite for that much capacity.

“The Obama administration in my eyes, and the Department of Energy, and most recently the Secretary of Energy signaled very clearly that they are comfortable exporting LNG,” Zenker said. “The real issue is, are they going to have to come up with some hard ceiling on the amount of exports?”