Natural Gas Prices Continue to Fall on Tech-Driven Supply Increase

Talk about changes in the oil / natural gas relationship. Once, rising oil prices would lead to rising natural gas prices, then the two markets became decoupled due to different supply factors -- oil is produced and sold globally, while natural gas remains primarily a local commodity.

Now, rising oil prices are helping to push already low natural gas prices even lower.

How so? Many of the geological concentrations that have oil also yield natural gas. And with oil prices at/near $100 per barrel, there is a tremendous financial incentive for oil producers to get at that oil, and as a result, they're capturing natural gas simultaneously or as a byproduct, which is adding to an existing glut of natural gas in storage in the U.S.

Natural gas prices Tuesday afternoon sank 18 cents to $2.48 per million Btus (MMBtu). Natural gas prices have plunged about 55 percent since June, and 40 percent in the last two months. They had traded above $6 per MMBtu in 2010.

'Fracking' Adds to Natural Gas Supply

The primary reason for the natural gas price plunge is technology. Supplies have surged largely due to new drilling techniques such as hydraulic fracturing or fracking that has enabled drillers to capture natural gas in locations where previously it was not technically possible. However, the aforementioned byproduct fuel capture is putting downward pressure on prices.

The market has been overwhelmed with gas, said Anthony Yuen, a commodities analyst at Citibank, USAToday.com reported Tuesday.

A third factor? Natural gas driller unwillingness to take rigs out of production, despite its low price. Some of these natural gas sites have very low production costs, hence they're still profitable at the lower prices. In other cases, drillers are operating to cut their losses.

Energy Analysis: In the middle of the last decade, natural gas appeared to be in short supply in the U.S., even after including imports. Natural gas prices rose above $8 per MMBtus in 2004, then spiked above $14 per MMBtus in 2005 and basically stayed above $6 per MMBtus through the end of the decade.

However, as noted, this decade's new drilling technology, especially fracking, has opened up vast new regions of natural gas, especially in the Marcellus formation (Northeast / Mideast U.S.). As a result, estimated U.S. natural gas reserves have increased roughly 35 percent. Further, although fracking is under investigation by U.S. and state environmental officials for possible ground water contamination and other pollution at certain sites, fracking is likely to continue at those drilling sites without problems. And so long as a moratorium on fracking is not imposed, that suggests continued U.S. natural gas supplies well above the 5-year average, and that will keep a downward pressure on prices.

However, homeowners and business owners should keep in mind that low prices for energy commodities do not last forever. Historically they cycle at irregular lengths.

What could trigger a new bull market in natural gas? You guessed it: increased use of natural gas as a substitution fuel. About one-half U.S. households heat by natural gas and it's used to generate about 25 percent of U.S. electricity. Further, although natural gas as a civilian transportation fuel to-date has been minuscule, its use in fleets (buses, delivery trucks, garbage trucks) is rising. Also, gas-based heat and electricity will likely continue to rise, as will transportation use, assuming oil prices remain high, or above $70 per barrel.

Of course, the above natural gas trends would be interrupted if not slowed, if the price of oil collapses to $50 per barrel.

But don't hold your breath waiting for that to happen.

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