Rising U.S. shale gas production is driving fear out of the futures market, says Goldman Sachs Group Inc., and will constrain prices for the next two decades.
Gone will be the near tripling of costs to $15.78 as in 2005 as traders remain confident the fuel will be there when needed. Natural gas will trade “largely” at $4 to $5 per million British thermal units for the next 20 years, says Goldman Sachs. Societe Generale SA sees prices at $5 through 2019. Bank of America Corp. forecasts $5.50 for 2017, while BlackRock Inc. projects $4 to $5 for the next decade.
Prices were four times more volatile in 2009 than they are today as production grows for the ninth straight year and new pipelines deliver the fuel to customers. Gas for use next winter costs 3.2 percent more than now, the smallest premium for the peak-demand period since 2000. Stockpiles will start the heating season at the lowest levels since 2008.
“The market is rightfully not that worried because you have so much supply that is coming online,” Jeffrey Currie, head of commodities research at Goldman Sachs in New York, said in a June 23 telephone interview. “We have enough flexibility in the supply system.”
Natural gas futures for July delivery slid 15.3 cents to $4.40 per million Btu on the New York Mercantile Exchange, the lowest settlement since May 22. The January contract fell 12.1 cents to $4.576, and its premium over the July contract was 17.6 cents.
The U.S. Energy Information Administration forecasts natural gas prices will average below $5 through 2023 and less than $6 until 2030. The fuel will average less than $5 through 2017, based on analyst estimates compiled by Bloomberg.
Fears of gas shortages have dissipated since 2005, when hurricanes Katrina and Rita damaged Gulf of Mexico production platforms. Offshore gas accounted for 5 percent of U.S. supplies last year, dropping from 17 percent in 2005, as shale-gas output, boosted by hydraulic fracturing, or fracking, surged from Pennsylvania to Texas.
U.S. output will increase 4 percent in 2014 to a record for the fourth consecutive year, according to the EIA, the Energy Department’s statistical arm.
Gross production from the Marcellus field in the Northeast, the country’s largest deposit, will average 15 billion cubic feet a day in July, up 26 percent from a year earlier and 10 times the output in 2009, EIA date show.
“Right now prices are close to or a bit below where the economics are needed to sustain volumes for the longer term,” Poppy Allonby, a portfolio manager at BlackRock’s Commodity Strategies Fund in London. Shale production will keep gas in the $4-$5 range for the next 10 years, though prices may jump with demand from time to time, she said.
The new complacency among gas consumers has reduced trading and lowered prices, Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York, said in a June 19 telephone interview.
Open interest in Nymex gas was 1.05 million contracts on June 24, down 26 percent from a year earlier, according to futures market data compiled by Bloomberg.
“Prices are really depressed and they don’t reflect the demand story,” Viswanath said. “If there are enough of these customers who have not purchased their supplies ahead, we are likely going to see some price volatility.”
Open interest in gas futures, the number of outstanding contracts, rose to an all-time high of 1.59 million in April 2013, when a cold start to spring caused what was then a record stockpile deficit. On April 18 of that year, the December 2025 futures contract traded at $7.216, about $2.80 above the front month. Today, the spread is about $1.40.
The added ability to move the heating fuel to nearby consumers in the winter, when demand is highest, has kept futures prices trading within about 33 cents of $4.50 since early March even after inventories dropped to an 11-year low.
Based on the EIA’s estimates, stockpiles at the end of October will equal 43 days of normal winter demand. The 10-year average is 50 days.
Fewer days of supply “is a larger bet by the collective wisdom in the marketplace that maybe we need less gas in storage,” Martin King, an analyst with FirstEnergy Capital Corp. in Calgary, said in a June 17 telephone interview. “There is a real complacency with the view that supply will bail us out, no matter what.”
The U.S. had 2,431 trillion cubic feet of recoverable gas, more than any other country, a June 2013 government analysis showed. This represents a century’s worth of output and can support peak production at more than twice the 2013 level, according to Goldman Sachs.
Gas stockpiles will climb to 3.424 trillion by the end of October, which would be the lowest level at the start of a heating season since 2008, from 822 billion cubic feet in March, the least since 2003, according to EIA estimates.
TransCanada Corp.’s ANR Pipeline completed a project in April that began sending Marcellus gas west, according to the EIA. Spectra Energy Corp.’s Texas Eastern Transmission pipeline plans to bring 900 million cubic feet a day of capacity online to move gas out of Appalachia.
The Rockies Express Pipeline, which can carry 1.8 billion cubic feet of gas daily from Colorado to Ohio, is making part of the line bidirectional, giving the company the option of sending Marcellus gas west to Indiana and Illinois.
“Even if stockpiles end at 3.55 trillion, or something really low like that at the end of October, you have that continued flexibility” from new pipeline capacity, Goldman Sachs’s Currie said. “People no longer have this fear of the future.”