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Page added on August 13, 2014
Robert Rapier: Why Natural Gas Prices Collapsed
Over the course of the next two columns, I plan to finish up the recent look at BP’s Statistical Review of World Energy 2014. The final two columns will focus on renewable energy, and carbon dioxide emissions.
Today I want to provide an update on the natural gas picture, as prices declined sharply at the end of July. I have laid out the argument since last winter that because of the deep inventory hole that developed over the course of the exceptionally cold winter, natural gas prices would remain high relative to last year, and that as a result natural gas producers would likely report higher year-over-year profits. (For background on the inventory picture, see my February column Natural Gas Inventories are Headed Toward Zero).
First, let’s look at what natural gas prices have done since winter. The chart below from the Energy Information Administration (EIA) shows that natural gas prices have been higher this year than they were either of the past two years as expected, but that toward the end of July the price fell sharply.
So what has happened? Two things. The first is that producers have been producing at higher rates than they were either of the past two springs. Thus, on the supply side the situation looks pretty good. In fact, the EIA recently reported that natural gas production in the Marcellus Shale region had exceeded 15 billion cubic feet per day (Bcf/d) for the first time ever.
But the bigger issue — as it was in the winter — has been unseasonable weather. Generally in the summer demand for natural gas spikes as utilities react to increased loads from air conditioners. This summer has been like this past winter — cooler than normal. In fact, this summer is flirting with record cool temperatures across many cities across the US, and that has reduced the demand for natural gas. This has meant that inventories are recovering faster than expected, and that has reduced the fear premium that existed in early spring. Gas inventories are still below normal for this time of year, but the potential for more cool weather has investors betting that inventories will be in good shape once high demand season begins:
Natural gas producers have been reporting higher year-over-year earnings as I expected, but many have sold off over the past month due to concerns about shrinking margins. Natural gas prices have recovered some of the year-over-year premium in recent days — the current price of $3.97 per million British thermal units (MMBtu) is $0.63/MMBtu higher than the price a year ago — but if the summer continues to be cool it is much less certain that premium will be maintained.
One word of caution though is not to be confused by natural gas seasonal pricing effects. When I argue that natural gas prices will be higher, I have always tried to make it clear that I am referring to year-over-year prices, which will impact year-over-year profits for gas producers. But July gas contracts will generally be cheaper than February contracts because of seasonal demand. So you can expect in most cases gas prices to actually decline between winter and summer, but the year-over-year differential is what is important.
Conclusions
My thesis last winter was that low inventories would lead to higher year-over-year natural gas pricing, and that has proven accurate through the end of July. Year-over-year profits for gas producers have been higher. But a cool summer has meant that inventories have headed toward normal levels faster than expected.
Weather is always a short term risk factor in the natural gas market. If this winter resembles last winter, we will again see high natural gas prices, especially if we don’t recover to normal inventory levels by the start of injection season in ~mid-November. (Inventories are still 20% below the 5-year average for this time of year). But as recently as 2012 we had an unseasonably warm winter, and natural gas prices collapsed in response.
If you are a long-term investor in natural gas companies or infrastructure providers, these seasonal fluctuations are not important. Over time, they will average themselves out, and there are a number of factors that argue that natural gas prices will move higher than may be implied by natural gas futures prices.
Consumer Energy Report » R-Squared Energy Blog
29 Comments on "Robert Rapier: Why Natural Gas Prices Collapsed"
Shaved Monkey on Wed, 13th Aug 2014 4:38 pm
Not in Australia
We have had cheap prices that are about to double as we begin exporting and having to pay what the rest of the world is willing to pay
Kenz300 on Wed, 13th Aug 2014 6:52 pm
Fossil fuels and nuclear energy prices keep rising and causing environmental damage.
Wind and solar prices keep dropping and once installed have no monthly fuel costs or price increases.
Wind, solar, wave energy, geothermal and second generation biofuels made from algae, cellulose and waste are the future.
Alternative energy is growing in use around the world.
——————–
Global Renewable Energy Status Uncovered
http://www.renewableenergyworld.com/rea/news/article/2014/08/global-renewable-energy-status-uncovered?page=all
Nony on Wed, 13th Aug 2014 10:16 pm
Rapier is shading the truth when he says “my prediction has proved true”. The tone of his winter article was more negative than what we experienced.
“This may lead to more spiking prices in the weeks ahead, but more importantly it will probably support higher than normal natural gas prices for the rest of the year.”
Note, he didn’t say higher versus some depressed yearly price or higher than 2013. He said higher than normal rest of the year. We’re at $4/mcf.
HE wrote a piece with an alarmist tone when inventories got low and what has happened has been not bad (read any of the news reports on how price evolved in the summer for different reactions).
Here is another quote of his from February:
“Natural gas prices have been falling in recent days, but I think that sell-off is premature. I predict that we will drop below the previous all-time low of 642 bcf from 2003. If the weather warms up soon we may be able to avoid it, but it looks increasingly likely to me.”
Nope, Robert. The drop in price as of late FEB continued. March was cheaper than FEB.
Instead of covering your butt with legalistic nitpicking, just admit that things worked out better than you expected.
Nony on Wed, 13th Aug 2014 10:23 pm
“The media hasn’t spent much time covering this issue, but I expect it will garner some attention if we drop below 1 tcf next week since it hasn’t happened in over a decade. This would put the US about one more cold snap from sending natural gas prices to the moon.”
The Moon! Yeah…prices went to the Moon. Not.
dissident on Wed, 13th Aug 2014 10:31 pm
The whole “shale” revolution is a ponzi scheme. Massive borrowing is required to keep the train rolling which is never going to be paid off. The train will go off the rails before the resource limits are reached.
RobertRapier on Sat, 16th Aug 2014 11:59 am
“Nope, Robert. The drop in price as of late FEB continued. March was cheaper than FEB.”
I presumed you would have to make an appearance, despite having not a leg to stand on. Look at the first graphic and tell me again that prices never spiked after February.
Read again what you quoted: “This may lead to more spiking prices in the weeks ahead…”
Check. Prices spiked in the weeks ahead. You can read a graph, right? You see that big spike in March? If you don’t like it, argue with the EIA. That’s their data showing it to be true.
And “it will probably support higher than normal natural gas prices for the rest of the year.”
How exactly do YOU define “normal?” I have defined it repeatedly, in article after article, relative to last year and I framed the articles again and again relative to year-over-year profits for gas producers. So unless you have some ultimate definition of “normal” that you think overrides the way I have used it (in enough instances outside this article both before and after it that my frame of reference was clear), you just don’t have a leg to stand on and are still trying to save face from this false narrative you created and promoted.
Finally “This would put the US about one more cold snap from sending natural gas prices to the moon.”
I see you have real trouble with reading comprehension. When I write “If X, then Y” one understands that I believe X must take place for Y to occur. If X doesn’t take place, then you can’t say “No Y. You were wrong!” This is really, really basic stuff and the only reason one would get it wrong is purposeful misrepresentation or serious stupidity. I don’t think you are stupid, so that leaves misrepresentation.
Your whole argument is idiotic. Had you just stuck to the one prediction I got wrong “I predict that we will drop below the previous all-time low of 642 bcf from 2003” — you would have been fine and I wouldn’t have argued about that. Instead you filtered the things I wrote through your preconceptions, screwed it all up grandly, repeated it often, and now can’t acknowledge that maybe the problem lies with your interpretations.
Nony on Sat, 16th Aug 2014 1:22 pm
INVENTORIES HEADED TO ZERO!
PRICES TO THE MOON!
RobertRapier on Sat, 16th Aug 2014 4:08 pm
Neither of those things you wrote above are things I wrote, and to the extent they are close to what I wrote, there is no context. But you haven’t exactly been seeking truth here, have you? You have been seeking to protect a flimsy narrative you spun that was only ever supported by your opinion, and by extrapolating to what you were certain I must be implying.
But your trolling is acknowledged. We are done. Whether you are a liar, stupid, or just unable to admit you are wrong — no matter. The end result is all the same. After a point it’s just trolling.
Nony on Sat, 16th Aug 2014 5:07 pm
When I quote something, you say it’s out of context. One of those quotes is from your title, dude!
When I talk about the general TONE of your article…which was WAY NEGATIVE AND ALARMIST, you retreat to little games like ‘I never gave a number’ and Clintonian word parsing and want quotes.
Oh…and you sure as heck did NOT say in that article that “normal” gas prices were last year’s prices. That’s an after statement. To cover your ass.
I don’t think a single soul would have thought a lower March than FEB pricing as well as Aug in the 3s was consistent with your narrative.
I’d rather be a troll than a coward. And I think someone who plays the little games you do is a coward. I think you should admit that the outcome was broadly inconsistent with the tone of your article.
Even the crap about recent days selloff is a mistake. No…dude…the selloff made sense!
You want to call me a troll? I call you a coward. Afraid to admit you were wrong.
RobertRapier on Sat, 16th Aug 2014 5:22 pm
“When I quote something, you say it’s out of context. One of those quotes is from your title, dude!”
This is what makes you either stupid or dishonest. The word “to” is not the same as “toward.” Look them up. If I say I am driving “toward” Texas from Florida, and then stop in Louisiana, only a troll would say “You lied because you said you were driving to Texas.” Toward means in the direction of, whereas what you have substituted could be read as eventually ending up at a destination. There are reasons for using specific words in specific instances, but when you start to substitute other words you end up with faulty conclusions. So your mistake, and then your mistaken conclusion based on your mistake.
The other quote is half a sentence. Look up “out of context” if you don’t know what it means. Or I can start quoting half sentences of yours as an example.
If you can’t admit that you were wrong about something as black and white as misquoting the title — you are absolutely a troll. And if you can’t even get the title right, what makes you think that your interpretations about any of the rest of the article are right?
As I said, I made an actual prediction in January about natural gas prices for 2014 relative to 2013. I put that out there, for the record. It is noted as a prediction, not “If X happens, then Y.” I would be happy to see what predictions you put on the record at that time. Right now my prediction is on track to prove accurate — but maybe you made a better prediction? If so, show me.
Nony on Sat, 16th Aug 2014 5:25 pm
“Natural Gas Inventories are Headed Toward Zero” (title of your article!)
I didn’t change the context. And I didn’t change the tone. You are a whiner to even get into the exact quote wanting. The exact words don’t change anything.
The only reason I didn’t go get an quote was laziness. Not to try to make you say something you didn’t.
You on the other hand are dancing around trying to redefine “normal” and take credit for a couple days of 7$ gas as validating the overall thesis of your article. That’s weak.
Nony on Sat, 16th Aug 2014 5:28 pm
I knew you would do it! I knew it!
Inventories are always headed declining in February! So your article has no meaning then.
I can’t believe you came in here with that little dodge. Weak, weak, weak.
The whole thesis of your article was that we would have a squeeze. NOTE, I have always given you credit for realizing we would not get to zero (price would skyrocket). But we had nothing like the price spikes of the Northeast. Had two days at 7$.
The towards/to is just silly man. We’re ALWAYS GOING TOWARDS zero in February. Even if inventories are fat!
Nony on Sat, 16th Aug 2014 5:29 pm
Just man up and admit that we had less of a squeeze than you expected. And that things are looking pretty cherry right now. No systemic insight from that cold winter AT ALL.
Nony on Sat, 16th Aug 2014 5:34 pm
I admit that I did not make an exact quote of the title (nor did I intend to). I obviously knew whether or not I had gone and cut and pasted or not.
Will you please admit that the events that unfolded were less dramatic than the overall thesis of your article?
Nony on Sat, 16th Aug 2014 5:37 pm
Right now inventories are going towards infinity. Sheesh.
RobertRapier on Sat, 16th Aug 2014 5:51 pm
“Will you please admit that the events that unfolded were less dramatic than the overall thesis of your article?”
You don’t seem to understand that “tone” is something you interpret. Even though I liberally say throughout the article things like “If we have another cold snap…” — you happily just omit the qualifiers and that of course gives a different tone. Just like substituting “to” for “toward.” They mean different things, even if you try to downplay these sorts of mistakes. But the very fact that you did that explains why you did the rest. You are interpreting tone through your filters, and it’s easy to see what those are.
It’s as if I said “If it gets any colder, I am going to have to buy a warmer coat.” I am saying my coat is inadequate for any weather colder than the current weather. So then the weather warms up, and you chastise me for my “prediction” that it would get colder.
The article was all about what could happen. “Here is the situation, here are the risks, here’s what could happen, etc.”
You took all of that, processed it, and came up with “Here is my prediction.”
Nony on Sat, 16th Aug 2014 6:01 pm
Headed towards infinity, now. Literally true. The logic you use to defend yourself.
———-
“Natural Gas Inventories are Headed Toward Zero”
” If withdrawals continue at the current pace, the inventory level would reach zero the week of March 28th” [then the caveat on price stopping actually reaching zero]
Now…of course “if withdrawals continue at the current pace” is a caveat…but then down in comments someone makes the great point of what is the chance of that happening! Why are you making comments like that if they are so unlikely. It’s like me saying if injections continue at the current pace through December…
RobertRapier on Sat, 16th Aug 2014 6:02 pm
“The whole thesis of your article was that we would have a squeeze.”
There you go again. Very clearly, it’s we “could” have a squeeze, and I explained what could cause it. You turn “could” into “would” and then you have a much more aggressive interpretation, which is what you chose.
“Will you please admit that the events that unfolded were less dramatic than the overall thesis of your article?”
Not my problem that you inserted more drama into the situation than was called for. In this current article, I explain why we are where we are today. “Here’s what happened after winter.” The summer didn’t warm up as much as normal (not something predictable) and natural gas producers produced like crazy to make up the deficit (which I have maintained would happen), and they are reporting higher profits as a result (also what I projected would happen).
But I will admit that events did unfold less dramatically than the dramatic spin you put on my article after you finished processing it through your filters. Of course when you recognize that you are replacing “could” with “would” and “toward” with “to”, you might begin to understand why you made such a dramatic interpretation.
RobertRapier on Sat, 16th Aug 2014 6:04 pm
“It’s like me saying if injections continue at the current pace through December…”
But if you are doing that to set up a point (e.g., prices will collapse in response before that happens) — then that is understandable.
Nony on Sat, 16th Aug 2014 6:08 pm
There wasn’t a single more cold snap in March?
http://www.bloomberg.com/news/2014-03-19/march-cold-snap-threatens-east-with-deep-freeze.html
Nony on Sat, 16th Aug 2014 6:16 pm
I still think you’re not being honest with others or yourself, Robert.
RobertRapier on Sat, 16th Aug 2014 6:21 pm
“I still think you’re not being honest with others or yourself, Robert.”
As long as you recognize that what you “think” is just your opinion, which at least in part you based upon demonstrably misrepresenting what I wrote — then I am fine with that.
Nony on Sat, 16th Aug 2014 6:31 pm
The demonstrably misrepresenting are little word nits, Robert. You’re ignoring several important things. Such as the literal truth that you’re always going towards zero in February. So to/towards is silly. Oh…and they really don’t mean any different. Since they’re prefaced by “headed”. I can be headed to the West Coast but not get there. I can be headed toward the West Coast but not get there.
You wrote about prices spiking and we had two (2!) days of 7 $ gas in March. We didn’t set a record for low inventory. The ‘at the current pace of withdrawals reaching zero’ was either silly or disingenuous. Especially combined with the title.
Nony on Sat, 16th Aug 2014 7:27 pm
“If you are a long-term investor in natural gas companies or infrastructure providers, these seasonal fluctuations are not important. Over time, they will average themselves out, and there are a number of factors that argue that natural gas prices will move higher than may be implied by natural gas futures prices.”
I don’t see how the article supports (or even explains) the last sentence.
Nony on Sat, 16th Aug 2014 7:28 pm
I mean the point about NG moving higher than futures at the end of the sentence (not the seasonal averaging at the beginning).
RobertRapier on Sat, 16th Aug 2014 8:50 pm
“Such as the literal truth that you’re always going towards zero in February.”
This isn’t even worth arguing any more. We had NEVER had a withdrawal of that size over a winter before. Did you know that? NEVER. So we were withdrawing at the fastest pace in history (which I don’t think anyone else except for me publicly noted), and getting dangerously low on inventories. Hence, a definite risk of spiking prices at the end of the season. That risk existed, even if you want to use 20-20 hindsight now to downplay it. My advice as a result of that risk was to buy natural gas companies (at Investing Daily I run a portfolio; we made 10 natural gas picks and all 10 returned double digits).
“I don’t see how the article supports (or even explains) the last sentence.”
I have numerous other articles that detail all the reasons for longer term higher natural gas prices. I go into all of the demand side drivers, discuss the supply side, and the risks.
I think that’s what you don’t understand. What I do is often explain and provide context to what’s happening in the energy markets. I explain the risks associated with what’s happening. I discuss the things that could drive prices up and down, and how probable I believe those events are. That’s not all contained within that one article, but I have probably more than a dozen articles detailing what I think will happen with natural gas prices and why.
I think gas at or above $5 in 3-5 years will be the norm, contrary to what the futures markets predict. Now is it possible they will go down? It is, and I discuss that possibility as well. What that will take is continued expansion at the rate of recent years, and even then it isn’t a sure thing. There are LNG export applications for more volumes than have been increased over the past 5 years. The DOE has done a study estimating the impact on prices from these LNG exports. There is also the phasing out of coal. There are chemical plants moving back to the US to take advantage of low natural gas prices. Many drivers on the demand side.
So, explaining the risks and possibilities isn’t the same as making predictions. When I make a prediction, I make it clear that it’s a prediction. My predictions aren’t vague. My January predictions are all specific and measurable. At the end of the year, there will be no room for interpretation. And when I get some wrong, I always explain why I got them wrong. You have interpreting predictions where I didn’t make any. You don’t know me. But you can ask anyone who does whether I am a straight shooter. I am direct and honest. You have merely provided an overly aggressive interpretation of my article and then criticized me for that interpretation.
I am an engineer. I do a lot of risk assessments. Saying “The plant could blow up if X and Y happen” isn’t the same as predicting that the plant will blow up. It’s identifying X and Y as risk factors, and hopefully being able to quantify and mitigate them.
Nony on Sat, 16th Aug 2014 9:02 pm
““I don’t see how the article supports (or even explains) the last sentence.”
This wasn’t a prediction nit, just a criticism of the writing. I don’t think you can expect people to have read all your other articles. And a big concluding sentence like that should reflect the content in this article. It’s not a big deal…just gave me a “huh” factor and I’ve actually read a few of your pieces.
Nony on Sat, 16th Aug 2014 9:04 pm
I made the point about always heading to (towards) zero in February, just because you were getting into the word-parsing. Yes, I read the article as you saying that there was a good chance of a squeeze. The title in particular was rather strong if you didn’t mean the trivial point of FEB inventories always being on the decline.
More later. Behind on writing up some interviews.
Nony on Sat, 16th Aug 2014 9:08 pm
I thought the January predictions were pretty timid.
I think there was more than just a “there is a chance”. Yes, you did have some caveats about chances in there. But you also said the selloff was premature. (sorry, I’m too tired to look up the article and cut and paste, but it’s a fair paraphrase.) This would indicate a more than 50% Bayesian belief. But in actuality the selloff made sense. We never got the squeeze.