The natural gas frac attack continues to rewrite energy history. Natural gas prices continue to plummet as global warming continues to favor us and the techniques in the energy industry continues to drive down natural gas prices. The winter strip for natural gas prices are at a 10-year low while supplies hover at an all-time high for this time of year. In fact the front month natural gas contract is within shooting distance of taking out the November 2009 low of $2.409 low and if taken out, could lead to the test of the $2.000 area. According to data compiled by Reuters News natural gas prices have dropped a whopping 18.7% in the last six trading session, which is the steepest six-day drop in nearly 4-1/2 years. And at the same time, Reuters points out that strong volume and record high open interest indicate that traders are starting to pile in with bearish bets.
Not only that, as my good friend Ben Smith of Enercast points out, this would make natural gas cheaper than our most inexpensive coal. Ben Smith says that currently we have probably picked up all the new gas fired generation demand we will get at current rates but we are about to enter a price point for natural gas that makes it cheaper to burn than Powder River Basin coal. Powder River Basin coal is the cheapest source of coal in the U.S. and supplies roughly 40% of our nation's coal. At current PRB prices, natural gas will begin to be cheaper to burn at prices below $2.50 for many regions in the West and some Midwest markets. This is a huge amount of potential new demand that can possibly materialize in 2012 if natural gas prices remain weak. He goes on to say that if natural gas prices can remain below PRB for an extended period, there is around 4-6 bcf/day of total new demand that could be created over the next year. This is because there is still plenty of spare idle gas fired generation capacity. The impact of this will appear most pronounced in the spring period when coal and nuke generation is offline. The maintenance season will become longer and more heavily support gas demand as coal plants come offline for extended periods to retrofit with scrubbers. There are around 500 coal plants that will be retrofitting with scrubbers over the next 3-4 years and a typical job takes 3-4 months.
Coal plants got a reprieve when a federal court ruled that the U.S. Environmental Protection Agency had to delay implementing rules on interstate air pollution on January 1, siding with electric power producers seeking to defeat the new regulations. Had those regulations gone through we would have seen the demand for natural gas soar. Yet now it will be low prices that will improve the demand outlook.
It was reported last week by Baker Hugh's that natural gas rig counts overall hit a two-year low yet directional rigs actually increased. So while rig counts fell production of natural gas still hovers around the five year average. It is just too cheap to produce in this new environment where the US is now the Saudi Arabia of natural gas. Old King Coal better watch his back as gas is on a frac attack!
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at firstname.lastname@example.org.