Permanent Natural Gas Volatility Change?

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Perusing my copy of the Wall Street Journal, I saw a piece by Ben Casselman that really caught my attention. Anybody’s who has been trading commodities over the last decade knows how volatile natural gas prices have been.  The commodity is perennially zigzagging from boom times to bust. In case you don’t know it, we’re currently in the bust state. So much natural gas has been discovered and pumped recently that prices have dropped from the $12+ range of late 2008 to the mid $2’s in 09. Right now the price is around $4. If any more natural gas is pumped out of the fields we’re all going to have to start gargling in it. Nobody knows where to store the stuff anymore!

What’s an NG producer gonna do? Cap the wells? That’s what traditionally was done when supply exceeded demand. And due to the delays in bringing new wells online when better sale prices beckoned, this caused a subsequent scarcity, sending prices skyrocketing.

What’s changed now is that new technologies to extract gas from shale fields, known as “fracking”, have permitted producers to tap huge fields that can last for decades, as opposed to smaller fields that run dry in a half dozen years. The US energy supply of natural gas has gone from about a 20-year reserve to around a 100-year reserve  in just a few years!  So now energy producers are not only able, but desparatetly willing, to lock into long-term agreements at a set price.

Who benefits from this trend? The electrical utilities, and the pipelines. The precarious pricing structure of natural gas has been the main factor keeping electrical utilities shy of converting more of their utilities to use this as a primary energy source in lieu of the  much dirtier coal or the much more expensive oil and alternative energy technologies.

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Who gets hurt? Well, a lot of natural gas producers who have been holding on by the skin of their teeth while hoping for higher prices in a few years may be forced to sell themselves to the highest bidder or go bust.

For the natural gas limited partnerships and trusts, it’s a mixed bag. On the one hand, their natural gas reserves are likely to command much lower future prices than one would have anticipated a few years ago. On the other hand, their reserves have probably increased 20-fold, so their volumes will eventually increase significantly, while their costs of extraction are much lower.

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