What is driving natural gas prices so high?

Jul 06, 2000 02:00 AM

In June, natural gas spot market prices approached $ 4.50 per mm Btu, and NYMEX futures were even higher -- more than double the previous year's prices. This raises two important questions: What is driving natural gas prices so high? How long will this continue? Using its proprietary natural gas resource and market assessment models, ICF Consulting recently simulated the market for the past two years and evaluated the factors that could affect natural gas prices.
According to ICF Consulting oil and gas experts Michael L.. Godec and Robert E. Baron, high oil prices are, by far, the primary driver for recent high natural gas prices. According to Baron, "Extreme weather, storage levels, short-term deliverability, and crude oil prices also have contributed significantly, but high oil prices are the big driver." "Today's conventional wisdom holds that crude oil prices no longer have significant influence on natural gas prices. But, this 'decoupling' appears to have been reversed, at least for the time being," said Michael L.. Godec, Senior Vice President and Managing Director of ICF Consulting's Oil and Natural Gas Practice. "Oil and gas prices decouple when excess gas supply exists and oil prices are low. In such instances, the gas market is driven by gas-on-gas competition, and gas prices at the burnertip fall below parity with petroleum prices. But, the situation is the opposite; oil prices are high and gas supplies are tight. As a result, oil and gas prices at the burnertip are near parity and have again become coupled." What happens if oil prices stay high? According to ICF Consulting's analysis, tight natural gas supplies appear to be sustaining gas prices in the short-term.

Low oil prices in 1998 depressed both oil and gas drilling, resulting in near-term concern over gas deliverability. However, in both the short- and long-term, oil and gas prices and E&P economics drive drilling. The low oil prices of 1998 reduced cash flow and caused the industry to postpone drilling investments. The greater level of drilling in recent months, supported by higher prices, will lead to increases in gas deliverability.
Will high gas prices continue? "In our opinion, deliverability concerns are short-term phenomena -- long-term indicators of supply potential and reliability appear strong," said Baron. "We believe that high gas prices are not sustainable; however, the timing of the decline is uncertain. In the long term, ICF Consulting's outlook on natural gas in North America remains quite bullish.
This view is grounded on irrefutable fundamentals. The rate of decline in gas prices depends on the sustainability of high oil prices. If oil prices remain high, then gas prices in the near-term may remain high, declining slowly over time as continued sustained drilling increases natural gas deliverability and causes a decoupling of oil and gas prices. If oil prices drop, then gas prices will follow, with oil and gas prices remaining coupled, re-equilibrating at a lower level at parity with petroleum product prices."

ICF Consulting's North American Natural Gas Outlook annually reviews and analyses the issues and events driving gas markets, such as new gas supplies, pipeline projects, and expected demand changes. The study projects market demand, supply, and prices and highlights changes from last year. The current analysis, which has recently been completed, closely examines market demand for gas from Western Canada and Atlantic Canada in addition to US Gulf of Mexico and other sources. The product, offered as a presentation to senior executives and managers of energy enterprises, is customised to discuss client-specific implications of study results. These may include short-term price sustainability, pipeline project impacts, gas storage issues, or price uncertainties, among others.

ICF Consulting's Energy Practice provides market assessment, asset valuation, due diligence, and strategic consulting services in all aspects of the North American energy market. ICF Consulting, with more than 30 years of experience, is one of the world's leading professional services firms advising clients on managing global resources in a sustainable way.
ICF Consulting helps clients optimise energy resources, meet environmental challenges, foster economic and community development, enhance transportation projects and policies, and manage information technology resources. ICF Consulting's more than 750 employees are based in Fairfax, Virginia and in 15 other offices throughout the world. The firm reported gross revenue of more than $ 100 mm in 1999.

Source: ICF Consulting
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