417. US NATURAL GAS GLUT CONTINUES
From Rigzone:
Natural gas prices after rallying on surprisingly strong labor market news have retreated in recent days as the prospect of full storage suggests the industry will be forced to curtail production unless demand picks up. At the end of July, natural gas in storage was almost 3.1 trillion cubic feet (Tcf), or about 25% above the 5-year average for volumes at this time of year. Estimates of full storage capacity range from 3.7 Tcf to 4.1 Tcf. At the date of this report from the Energy Information Administration (EIA), there were 10 weeks left to the storage injection season meaning that without a strong pick up in gas demand or a collapse in production, domestic gas producers are facing the eventuality of all having to curtail their production. When that happens, we should expect a meaningful drop in natural gas prices.Production continues to climb:
Futures prices are now as low as they have been since 2002:
by JD
posted by JD @ 5:24 PM
30 comments
30 Comments:
The new drilling methods certainly seem to be unbelievably fruitful. This is obviously good news for peak oil mitigation. Oh yeah, and my heating bill this winter. LOL!!!
DoctorJJ
I feel sorry for the people who followed TOD advice and locked in natural gas prices for this winter.
^
I'd love to have a link to some of that advice.
Nice try JD, we're pretty screwed. You are a moron if you are looking at natural gas as anything more than a year or two worth of substitutes for oil.
http://www.theoildrum.com/node/3673
riceFarmer,
That article is from February. It's been 6 months since then, and the newest NG finds have been in the past few months.
If you want a source from TOD, why not read Robert Rapier, who said that "that we have enough natural gas available that civilization isn't going to end any time soon due to lack of energy supplies."
Or are the only good TOD sources ones that fit your bias and are outdated?
And oil is at $72 and change, tracking the Dow pretty consistently now. How much of that $72 is evil speculators these days, JD?
HDT
HDT,
It's probably safer to say that the Dow is following the price of oil in many cases, as investors seem to want to believe that prices are an indication of the much ballyhooed "recovery.". As for how much of it is speculator, it's hard to say. However, demand still is not up, so there is a speculative premium, but how much is hard to tease from the data.
That said, with a large cushion in supply, and still slack demand, I think the price is clearly reflecting hope for a future economy that may or may not be there. 2016 contracts are for $90 and change, so some in the market seem to see oil prices as up, but not stratospherically high in 7 years. Makes sense, actually.
Oil at $20 a barrel by end of the year. Well, unless of course the dollar completely craters. Which is a distinct possiblity, what with all the money printing by the Federal reserve.
remember the natural gas cliff?
http://peakoildebunked.blogspot.com/2008/08/374-natural-gas-cliff-bends-wrong-way.html
"And oil is at $72 and change, tracking the Dow pretty consistently now. How much of that $72 is evil speculators these days, JD? "
The banks have been given over a trillion dollars and are not lending. Where is that extra liquidity going hmmm?
DB
We are flooded with gas (don't you love that sentence). We have gas coming out of our rear ends. And NG can be used in vehicles. 10 million CNG vehicles worldwide. Proven technology
A 100-year supply, and we are finding more all the time, and extraction techniques are still improving.
Rice Farmer: Your post just does not make sense. We are still on first-gen extraction techniques re shale gas. Exxon-Mobil maybe 2.0, coming on.
Re oil prices: I think OPEC is fighting a successful rear guard action on prices. But with CNGs, PHEVs, and global gluts in oil and gas, it is a rear guard action, and they could get pantsed anytime.
The question is: A global glut in fossil gas and oil: What does it mean?
That article is from February. It's been 6 months since then, and the newest NG finds have been in the past few months.
February 2008!!
ricefarmer, you might want to try educating yourself outside of the farm before you refer to someone, who is up to date on current events, as a moron. Clearly life on the doom farm is lagging at least 18 months behind!
Most doomtards have realized natural gas will not be a problem for the foreseeable future. How awful for them!!
rofl
I think the situation with oil prices is interesting too. I agree with Ari that it seems there's a little speculation involved at the moment, especially when comparing demand/stocks with the recent price development.
Just take a look at the latest EIA STEO
http://www.eia.doe.gov/steo
Seems to me that the collective belief of economic recovery/downturn affects the price a lot. Then again, who really knows the motives behind speculation? I don't think you can ever actually interview any of the players? I guess that means anyone's guess is as good.
Oh yeah, and another thing, have you considered removing comment moderation here? Really, I don't think the situation has ever been that bad.
"The question is: A global glut in fossil gas and oil: What does it mean?"
One would think it would mean lower prices. Yet oil keeps going up. What does it mean - that the glut is not really a glut?
"Yet oil keeps going up."
it's 1/2 the price it was in the summer of 08.
nice try.
Anon,
The price of NG has not been going up. It's been pretty flattish, at worst.
Oil is up, but to argue that the price is definitely a consequence of supply and demand ignores the fact that supply is by no means hurting and demand remains rather depressed.
Prices do not, in this case, necessarily reflect fundamentals. At all.
"...it's 1/2 the price it was in the summer of 08."
It's 3.5 times the price it was in 1999. How much of that is speculation?
HDT
HDT,
You keep asking that, as if the answer will somehow negate speculation's effects on commodities (it won't.) You also keep trying to suggest, if somewhat obtusely, that speculation doesn't play a role (or that its role is minor.)
Here's the fact of the matter: we cannot say, for certain, how much of the current price is "speculation." Considering that "speculation" is a bit of a catch-all term for how a futures-based market operates, it's hard to say how much of a price is based on any one factor. What we do know is this:
- Oil supply is currently more than enough to meet demand. That is nigh unquestionable.
- Oil supply at least for the next year or so, will be enough to meet demand. That is very difficult to question.
So, what does the $70 price tag represent? It's hard to say, actually, with any specificity-- pricing models are hard. However, I'd bet dollars to donuts that at least some portion of the current oil price has to do with speculation, seeing as the fundamentals have changed little since the price was $30/barrel.
And by some, I mean a lot. This is especially true considering that OPEC quotas are being snubbed by a number of member nations. There's a lot of crude out there, inventories are high, and demand is not likely to climb in the near future. If it's not traders betting on future demand, then what is it that's pricing spot prices?
At a certain point, logic just follows. We already saw oil contangoed in January, why is it so hard to believe the same is occurring now? A lot of these traders are still trying to figure out where the best bets lie, and since oil is a good bulwark commodity, why not? I bet you I could find a few guys at hedge funds putting big bets on oil (just go talk to the guys at Clarium, who love the stuff). That kind of money will affect prices, for better or for worse.
The most amazing statistic is the price ratio of oil to natural gas. I believe we are now seeing the cheapest natural gas, relative to oil, in history. This will clearly not last, as there are too many potential ways to substitute natural gas for oil. If nothing else, enhanced oil recovery will become increasingly popular, as natural gas can be used as the input energy to recover low EROI oil.
PJC
Slightly off topic, but here is an interesting op-ed piece from the NYT "'Peak Oil' Is A Waste Of Energy"
http://www.nytimes.com/2009/08/25/opinion/25lynch.html?_r=2&pagewanted=all
"Prices do not, in this case, necessarily reflect fundamentals. At all."
And to that I say "bullshit." Prices do reflect fundamentals. Speculation plays its role, as it always has, and nothing I've ever written here suggests anything to the contrary. The question I ask is, how much of the price is fundamentals and how much is speculation? Regardless, speculation will always be with us.
You and JD seem to think that high oil prices are purely speculative, and that if everyone would only live in your cornucopian fantasy, there would be no speculation and oil would still be $10/bbl based on your fundamentals.
Just watch - oil prices from here on will walk hand-in-hand with the health of the economy; if the economy gets better, oil goes up. When the next bubble pops in a couple of years, and demand drops with it, oil prices will drop.
If we were awash in the glut of oil you imagine, we'd still have $10 oil, regardless of what the economy does.
HDT
"seeing as the fundamentals have changed little since the price was $30/barrel."
the economy is recovering, that is what the stock market and oil market are telling us.
last fall the economy was tanking and now not so much. that's why oil is up and those are the fundamentals.
"It's 3.5 times the price it was in 1999. How much of that is speculation?"
Can we separate out of that the devalued dollar?
What is the oil price in ounces of gold over the past ten years?
No wait, I'll answer for you:
It is today 7/100, was 1/20 in 1999 and was 4/50 in 2004 or thereabouts.
Seems that it's about 25% higher now than in 1999 and was about 35% higher in 2004. HARDLY a disaster.
DB
The attitude of many on this list reminds me of the sport bike riders who crank their engines wide open to smoke their tires while the rev limiter kicks in and out.
HDT
HDT,
You're putting words in my mouth.
I never said that fundamentals don't play a role-- they always play a role. But the fact is that pricing models-- that is, how we try to separate the various variables and figure out how much each of them play a role in the market price-- are complex.
However, how much any specific price reflects "fundamentals" (itself a bit of a funny concept), is never really clear in most markets. Not only is it hard to figure out where the Pareto efficiencies lie, it's almost guaranteed that exogenous (that is, variables outside of the supply-demand equation) will play a role. Outside of perhaps perfect competition in a completely unregulated market (which pretty much never exists anywhere), prices will be distorted in nearly every market. That much is practically a given.
It's also funny to argue that prices in a market that's to a significant degree supplied by a cartel, which is by nature distortionary, is representative of fundamentals.
It's rather interesting to me that you explicitly admit that speculation plays a role, yet you imply that it cannot be a significant factor, but without actually demonstrating that demand and supply are materially different from earlier this year when the price was in the $30 range.
I've also never suggested, nor has JD (it's funny that you implicate him for something he's never argued as far as I can tell), that speculation is ALL of the price. That's silly. However, as Krugman states:
http://krugman.blogs.nytimes.com/2009/07/08/oil-speculation/
"Oil speculation is back in the news. Last year I was skeptical about claims that speculation was central to the price rise, because what I considered the essential signature of a speculative price rise — physical withholding of oil from the market, in the form of high inventories — just wasn’t showing.
This time, however, oil inventories are bulging, with huge amounts held in offshore tankers as well as in conventional storage. So this time there’s no question: speculation has been driving prices up."
Now, you can quibble with him about last year, but he's very right about the current prices: inventories are high, and demand is not. This is a classic speculatory signal.
Furthermore, let's make something very very clear: there are plenty of examples where speculation has driven prices to strange places. The Sumitomo copper affair is a great example of such:
http://en.wikipedia.org/wiki/Sumitomo_copper_affair
Note that I agree with Krugman about speculation, that is that:
"Now, “speculation” isn’t a synonym for “bad”. If the underlying assumptions that seem to have been driving oil markets were right — namely, that a vigorous recovery is just around the corner, and demand will shoot up soon — then it would be perfectly reasonable to accumulate oil inventories right now. But those assumptions are looking less reasonable by the day."
But to argue that any commodity price must follow fundamentals for any intrinsic reason is silly. It's clear, time and time again, that prices can be quite removed from internal variables.
Finally, calling the prices a "bubble," as you do at the end, suggests that oil is, in fact, being priced by speculation. Rather confusing!
Comparing current oil prices to those in 1999 is absurd. 1999 is a cherry picked year in which oil was ridiculously cheap - quite literally cheaper than water.
Such a low price might very well return at some point in the next 20-30 years. In the meantime $70 / bbl oil is hardly a refutation of the cornucopian view, particularly when coupled with cheap gas.
The cornucopian view is that substitutes will materialize to mitigate the shortage of high EROI oil. Cheap natural gas is one such substitute, as it can be used to substitute for oil in a variety of ways. Such substitutions are all around us in a variety of forms, and will grow so long as the oil-gas price gap persists.
"I've also never suggested, nor has JD...that speculation is ALL of the price. That's silly."
Of course it's silly, and I didn't say it or imply it. But speculation is indeed part of human nature and an integral part of market psychology. Speculation coupled with various incentives is why we have bubble cycles of all sorts, and why we appear to be entering another economic bubble inflation as we speak.
I simply asked _how much_ of today's ~$70 oil is speculation and how much is "fundamentals," a rhetorical question for those of you who seem to think that oil would be $10 or less were it not for speculators.
You can flood the carburetor of your car with only a few ounces left in the tank.
HDT
Of course it's silly, and I didn't say it or imply it. But speculation is indeed part of human nature and an integral part of market psychology. Speculation coupled with various incentives is why we have bubble cycles of all sorts, and why we appear to be entering another economic bubble inflation as we speak.
Well, sure. But there are times when prices in a commodity market largely reflect fundamentals, and times when they do not. Generally speaking, we expect prices to go down when supply is relatively high and demand is relatively low. As Krugman points out, the fact that we have oil sitting around, high inventories, and even oil in tankers, is suggestive to us of speculatory price distortion.
I simply asked _how much_ of today's ~$70 oil is speculation and how much is "fundamentals," a rhetorical question for those of you who seem to think that oil would be $10 or less were it not for speculators.
That's a rather difficult question, and one that I suspect will be hard to answer even for seasoned economists/econometricians. However, my rough, bootstrapped in my head estimate is: a lot. Not much has changed about the "fundamentals" since the price was in the $30s, $40s, etc., yet the price is significantly higher. People are pricing in the expectation of future demand that is currently not with us. It just logically follows that a significant portion of the spot prices are speculatory.
You can flood the carburetor of your car with only a few ounces left in the tank.
That's why I haven't owned a carbureted vehicle since my last motorcycle. That, and cleaning and synching them? Not worth it. Fuel injection is the way to go, if you ask me. Better gas mileage, too.
Will save the UK's bacon! They're looking at rolling blackouts in a couple years as their infrastructure ages.
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