Oil rocked by supply increase as EIA sees greater natural gas usage

The exit is not so clear

The EIA released the following report:

The Energy Information Administration (EIA) reported that U.S. natural gas prices have remained relatively low over the past several years as a result of abundant domestic supply and efficient methods of production. However, the cost of developing new incremental production needed to support continued growth in natural gas consumption and exports rises gradually in the AEO2013 Reference case, leading to an increase in the Henry Hub spot price. Henry Hub spot prices for natural gas increase by an average of about 2.4% per year, to $7.83 per million Btu (2011 dollars) in 2040.

As of January 1, 2011, total proved and unproved U.S. natural gas resources (total recoverable resources) were estimated to total 2,327 trillion cubic feet. Over time, however, the depletion of resources in inexpensive areas leads producers to basins where recovery of the gas is more difficult and more expensive, causing the cost of production to rise gradually.

In the Reference case, natural gas prices remain low at the beginning of the projection period, as producers continue to extract natural gas resources from the most productive and inexpensive areas. Drilling activity remains robust despite the relatively low prices (below $4 per million Btu), particularly as producers extract natural gas from areas with high contents of NGL or oil. Prices begin to rise after 2015, and they continue rising in the projection through 2040.

Energy from natural gas remains far less expensive than energy from oil through 2040

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The ratio of oil prices to natural gas prices is defined in terms of the Brent crude oil price and the Henry Hub spot natural gas price on an energy-equivalent basis. U.S. natural gas prices are determined largely on a regional basis, in response to supply and demand conditions in North America. Oil prices are more responsive to global supply and demand. A 1:1 ratio indicates that crude oil and natural gas cost the same in terms of energy content. On that basis, crude oil remains far more expensive than natural gas through 2040 (Figure 87), but the difference in the costs of the two fuels narrows over time.

With rising demand and production costs, both crude oil and natural gas prices increase through 2040; however, the oil price rises more slowly than the natural gas price, bringing the oil-to-gas price ratio down from its 2012 level. Low natural gas prices, the result of abundant domestic supply and weak winter demand, combined with high oil prices, caused a sharp rise in the oil-to-gas price ratio in 2012. Natural gas prices nearly double in the AEO2013 Reference case, from $3.98 per million Btu in 2011 to $7.83 in 2040 (2011 dollars), and oil prices increase by about 50%, to $28.05 per million Btu in 2040. Over the entire period, the ratio remains well above the levels of the two previous decades. Oil and natural gas prices were more strongly aligned until about 2006, and the ratio of oil prices to natural gas prices was lower. Since 2006, however, natural gas prices have fallen as a result of abundant domestic supplies and production. In contrast, oil prices have increased and remained relatively high as global demand has increased over the past several years.

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