Option Investor
Intra-Week Blogs

Independence Leaking

HAVING TROUBLE PRINTING?
Printer friendly version

Got Gas?

Natural gas prices rose to $11.36 on Monday and the highest level since the post Katrina high in Dec-2005. There are multiple reasons for the high prices. The Independence hub in the Gulf of Mexico was shut down to repair a leak on April 9th and recent updates suggest it could be out of operation for a month. This hub supplies about 900 million cubic feet of gas per day.

Thanks to a colder winter natural gas supplies in storage are only about 1.28 trillion cubic feet. This is down from a high of 3.54 trillion back in November. With the heating season officially over the current supply of gas is 18% lower than the end of heating season last year and 2% below the 5-year average.

Natural gas production in North America peaked in 2004 and despite a record pace of new wells it is still declining. Gas wells in general peak early and decline quickly. We do not produce enough gas to meet demand in the winter months and from the time heating season is over on May 1st until it begins again on Nov-1st it is a race to build up gas supplies in storage sufficient enough to cover our winter needs when combined with current daily production.

Natural gas may be hitting new multi year highs but it is still cheap compared to oil. Natural gas at $11.27 per million BTUs is well below oil at $14.66 per MBTU and heating oil at $23.88 per MBTU.

Several years ago there was much talk about importing LNG. Ridiculous prices were being discussed because LNG was so cheap.  Local producers were afraid LNG from the Middle East, Africa and Russia could hurt investment in U.S. exploration if allowed to be imported. We got past that mental hurdle after gas peaked in North America. LNG terminals were finally approved and the search for funding began. Surely importing cheap gas and selling at U.S. prices offered a huge potential for profit.

A funny thing happened on the way to LNG completion. Prices went up, way up. Now the U.S. is having trouble finding anyone to sell us LNG because the rest of the world is willing to pay more. Europe is being strangled by its reliance on Russia and China is starving for gas to fuel its growing economy. Electricity is undependable, brownouts and outages occur almost daily. Coal cannot be mined and shipped fast enough to feed the electric generation plants and the smog from unfiltered coal burning is killing tens of thousands every year in China. Clean burning gas is desperately needed and China is willing to pay a premium to get it.

Back in the U.S. wells are being drilled at a record pace, deeper, more technologically advanced and at great cost but the battle is being lost. LNG is no longer an answer. With current supplies in storage at multiyear lows and the Independence hub offline for a month you can bet prices are going higher. Running that air conditioner this summer is going to be expensive.

Jim Brown

Leaps Trader Intra-Week Blog Archives