Summary

The perfect storm is coming.

Natural gas demand is structurally increasing, while supply continues to fall.

We expect natural gas prices to average $3.50-$4.00 over the long run.

Buckle your seat belt, because a ride of a lifetime is coming.

Natural Gas - The Perfect Storm Is Coming

Just like the perfect storm that hit natural gas last year to sub $2/MMBtu, the perfect storm that will cause natural gas (NYSEARCA:UNG) prices to spike higher than $3.50/MMBtu is coming. In Jefferies' latest natural gas report, the energy team there believes that Nymex prices should be at least $3.50-$4.00 in the long run due to supplies finally falling and demand picking up. Even under the scenario of a normal weather season, supplies will considerably tighten, but our analysis points to a much more favorable weather pattern.

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The perfect storm is coming. After a 7-year bear market, many natural gas bulls have given up entirely on the sector. The continued rig efficiencies and technological improvements proved many shale bears wrong, and gas production continued to climb despite rig counts sitting at historic lows.

We think the market is ripe for a rip, and prices this time around will remain higher for longer. We think prices will average $3.50/MMBtu versus the STRIP estimate of $3/MMBtu, and natural gas producers will outperform going forward.

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http://oilprice.com/Energy/Energy-General/Why-Cheap-Shale-Gas-Will-...

This guy thinks the glut will soon be over...

Ellen, you obviously don't know GHS member, Art Berman.  Some publication allows him an article about once a year to pontificate upon why the whole shale energy play is a farce and all the companies, analysts and investors are lying about it.  If you'd like to read some of Art's past articles and what the members have to say about his opinion just type his name in the search blank at the top of the Main Page.

OK...thanks, Skip...I did that.  But what about this Seeking Alpha...Why Natural Gas will turn Bullish And there are more like that out there...are they all just a bunch of hooey?

I guess I want to see the glass half full.  I keep hearing about this La Nina...very hot summer and cold winter.  Obviously we are royalty owners that have been hit hard the last year and a half.

Proven reserves of domestic natural gas are immense.  The main basins containing those reserves have passed through the leasing phase and the infrastructure build out phase.  Those are sunk costs now.  The capital costs are now limited to simply drilling and completing wells. 

The Haynesville Shale was touted as the fourth or fifth largest gas field in the world when it was "discovered".  Only about 15 to 20% of the total wells required to fully develop those reserves have been drilled to date (seven plus years).  The Haynesville Shale Basin pales in comparison to the areal extent and reserve estimates for the Marcellus Shale.  Then there is the Utica Shale.  All three are natural gas plays.

As crude prices increase we will see an increase in drilling in the major oil plays:  Eagle Ford, Bakken, Permian Basin.  Oil wells produce "associated gas", so more natural gas supply not tied to the price of an mcf.  It's a by-product.

DUCs (Drilled, Uncompleted wells).  There are large numbers of DUCs that can be brought on line requiring only a few weeks of completion operations.  There are oil DUCs and natural gas DUCs.  When commodity prices support acceptable Internal Rates of Return (IRR) energy companies will start completing DUCs and drilling new wells.  Being unconventional reservoir wells they will come on like gang busters flowing a majority of their life long production in the first year or two.

Demand for natural gas will steadily and incrementally increase but the industry's ability to produce vast quantities of natural gas in a short time frame will be so great that continuing, periodic supply gluts will cap price increases.  There is good reason to be bullish natural gas long term as global demand will increase steadily over the coming decades.  However bullish we may be the bottom line is there is more supply than demand and that should be the paradigm for many years.  If you're looking for $2.50 gas later this year or into mid-2017 that's not out of the realm of possibility depending on weather-related demand spikes on top of increasing demand.  $3 may be a reasonable possibility by the end of this decade.  Keep in mind that a good many companies can now make acceptable IRRs in that range - $2.50 to $3.00.

I just don't see a scenario where we get to $4 for an extended period of time.  I don't expect to see double digit natural gas prices for the next twenty-five years.  Keep in mind that shale is ubiquitous.  There are likely many economic basins worldwide.  By the time other countries develop their reserves there will be a fully formed global supply network for natural gas and the majority of countries will source some significant portion of their energy needs with natural gas.

and on that cheerful note...!1

hard to argue with Skip's analysis. there are a few footnotes; PA and OH could follow in the footsteps of NY and ban or heavily regulate fracking. The EPA, if left to its own devices, could do that nationwide. The US could get more serious about greenhouse gases and pollution and push (shove, cram) the trucking industry to shift to NG and fund/push creation of the necessary infrastructure.

I think my note is more cheerful than yours, Steve.  :-) 

Regulation that seeks to address greenhouse gas emissions would hasten the decline of coal and help speed up the demand for natural gas. In states where land owners are receiving royalty income I doubt there will be any ban on fracking.  So I think PA and OH will be okay.  I also think that New York state and New England will come around eventually. 

Light duty vehicles can use CNG but long haul 18-wheelers would probably use LNG.  Commercial vehicles with set routes would work well from a re-fueling stand point.  Private vehicles will more likely go to electric as the infrastructure build out is less costly.

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