Natural gas hit a decade low and shows us once again the cyclical nature of commodities. Back in 2002, the last time natural gas was this low, the market was still trying to come to grips with the post 9-11 slowdown. Yet behind the scenes there was increasing worries about natural gas, which for years we had taken stable natural gas prices for granted. There was a movement toward cleaner burning natural gas and a surge in electricity demand as it seemed everyone in the country was leaving those computers plugged in. Natural gas was the best alternative for electricity generation as coal was too dirty and nuclear was a dirty word.
Yet there was trouble in paradise. While natural gas demand was surging, our supply was falling. Wells were depleting faster than expected and many parts of the country were off limits for drilling. The market had to come to grips with the fact that we had hit “peak natural gas production”.
This became such an issue that the Federal Reserve Chairman warned that this was perhaps one of the biggest threats to our long-term economic health. Even our friends over the border in Canada, our largest foreign provider of natural gas, told us that if supplies became tight enough they would meet their own needs before meeting ours. That sent natural gas on an incredible ride. A market that was generally thought to be a $2 commodity in the 1990s went crazy. We saw wild rallies and incredible volatility as the market had to come to grips with the potential of "peak natural gas.”
The piece de resistance of course came when natural gas prices hit an all-time high of $15.78 in 2005, just a few short years later. It looked like natural gas might never stop going higher! We needed to build import terminals to get liquefied natural gas from Trinidad or somewhere else out there. We had Iran, Russia and Qatar awash in natural gas talking about setting up a cartel to influence the price of a geographically tight commodity.
Of course behind the scenes high prices were curing high prices. The fracking revolution was getting under way. Now instead of worrying about running out of natural gas we have to worry about where the heck we are going to put it all.
Natural gas has a glut of epic proportions and we are running in danger of a total price collapse for this commodity. In the near term there is almost nothing at all bullish that we can possibly see for this commodity. Consider the fact that after a warm winter and record US production, our supplies are overflowing. According to the Energy Information Agency, working gas in storage was 2,380 billion cubic feet as of Friday, March 16, 2012 which put them a whopping 54% above the five year average. In other words, storage is already half full before the refill season has begun.
On top of that, if you look at rig counts they do not seem to indicate that production will drop significantly anytime soon. Reuter's News reported that the number of rigs drilling for natural gas in the United States fell by 11 this week to 652, data from oil services firm Baker Hughes showed last Friday. Horizontal rigs — the type most often used to extract oil or gas from shale — fell by 6 to 1,174. Not enough to make a big difference in the oversupply. Add to that we expect that many nuclear power plants will soon be coming back on line after maintenance.
Natural gas traders also seem to be ready for a collapse. According to the Wall Street Journal, hedge funds are placing bets that will pay off if prices fall further. They are buying put options.
Last week the number of open positions in July put options that pay out if natural gas falls to $2 or lower has risen more than 700% since January, according to exchange data. In other words, despite the passivity of more production cuts we could be getting ready for an epic collapse. A far cry from the mood we saw just a few years ago. From bust to boom to bust again.