Natural gas may be the most mispriced commodity these days. Its price has been below the cost of production for so long that the industry is suffering serious consequences with billions in losses—dollied up as “non-cash accounting charges.” Leveraged players are trying to keep their chin above water by selling assets. And drilling activity is collapsing. But demand for natural gas by power producers has been booming—and it’s killing coal one powerplant at a time.
It’s been tough for natural gas drillers. Prices crashed. Drilling activity collapsed. Producers are writing down their natural gas assets by the billions. And the bloodletting continues. On the other side, power generators have switched from coal to natural gas, pushing their consumption of it to new highs. A trend started two decades ago with a new technology and the usual suspect, Congress. A toxic brew for coal.
Natural gas traded at $3.22 per million Btu at the Henry Hub on Monday, a seven-month high, and a jump of 69% from its April low. Breathtaking when you think that a few months ago, the doom-and-gloomers, who’d been right for a very long time, were predicting chillingly that the price would hit zero by the fall, when storage would be full and excess production would have to be flared. But the pains for the industry are far from over.
Forecasting the price of natural gas is easy. The US Energy Information Agency does it regularly, and like all seasoned forecasters, it produces a slightly wobbly line trending slightly higher or lower. Based on its latest, we expect smooth sailing, with gently rising prices as is appropriate for the relaxing calm that reigns in the natural gas market. Alas, reality is a series of violent ups and down with sporadic and vicious spikes.
Today Japan brought its first nuclear reactor back on line, after having been nuclear-power free for two months. The government had stress-tested the reactor and had declared it safe—despite strong evidence to the contrary. Ironically, on the day that the reactor started generating electricity again, the Nuclear Accident Independent Investigation Commission released its report on the Fukushima disaster—and it’s a doozy.
The fiasco playing out in the natural gas industry doesn’t happen often in a free market, and when it does happen, it’s usually short: namely, prices below production costs. In the shakeout, less efficient or poorly capitalized producers get wiped out. Part of capitalism that weeds out weaker elements through sweeps of creative destruction. But in natural gas, the price has been below production costs for years, and the damage is huge.
Dirt cheap natural gas has done wonders for America. Bene-ficiaries are scattered across the country: households with lower heating bills, industrial users, utilities, companies dreaming of building LNG export terminals to benefit from prices that are several times higher in the international markets. Yet it’s tearing up the very industry that is producing it, and capital destruction has reached epic proportions. But the bloody end is near.
The plight of natural gas driller Chesapeake Energy could almost make you feel sorry for CEO McClendon. He lost his chairmanship after his conflicted entanglements and an in-house hedge fund had seeped out. The company announced it may run out of cash next year. Fitch, in downgrading Chesapeake, estimated that the shortfall this year would reach $10 billion…. All due to the low price of natural gas and the ugly economics of fracking.
Nuclear power is galvanizing Japan, stirring up public discussions and outright dissent with demonstrations and all, a rare occurrence in Japan. It has divided the country in two: those who want nuclear power generation to resume so that a stranglehold can be lifted from the economy, and those who want a “nuclear-free” Japan. But there is no quick way out, even if everyone wanted it.
The fourth warmest winter on record, which curtailed the use of natural gas for heating, coincided with record production of natural gas. Storage facilities, filled to record levels for this time of the year, may soon reach capacity, forcing the industry to flare excess gas. This, doom-and-gloom theorists go, will force the price of gas to zero in the US. The point of maximum pain. But there’s a monumental shift, and demand is spiking.