Will We See A Move Higher On Natural Gas?

Updated: Mar 30

| March 05, 13:13 GMT | By Mikaeel Nathanie

The market for natural gas in the past 13 years has fluctuated but overall has been heading towards the downside mainly due to advancements in horizontal drilling and hydraulic fracturing (fracking) resulting in the unconventional procurement of shale gas from shale rock.

The corona-virus pandemic saw prices of natural gas increase to $3.40, a 1.5% overall increase in comparison to natural gas’ peak price of $16.5. The inferior move up in comparison to other commodities was relatively weak indicating that the natural gas in the current climate is one of the weakest commodities in the current market. Prior to the pandemic, natural gas was one of the worst performing commodities in 2020 so it is only natural that there was no significant recovery.

Shale gas is relatively new and is one of the major factors that contributed to the decrease in natural gas prices over the past 15 years. The storage of shale gas as well as the production per country are notable factors when considering natural gas prices in the coming years, the following charts outline shale resources as well as production.

As we can see from these charts, the global shale resource is incredibly large in comparison to the production per country, countries like Argentina, Mexico, Australia and Brazil being in the top 10 in shale resources have yet to fully exploit their reserves signalling that shale gas is not going away any time soon which could mean years if not decades of low natural gas prices.

The energy abundant era we are currently in could expand even further as there is a transformational advancement in smart microchip proppant technology that could allow countries like Argentina and Mexico to cheaply frack the shale gas. This would result in increased supply of natural gas in the economy causing natural gas prices to drop even further.

The Henry Hub Natural Spot Price bases the actual supply and demand of natural gas as a stand-alone commodity, natural gas prices are often indexed to crude oil. Although some believe that natural gas and oil are decoupled due to the production of shale oil, in actuality the 10:1 thermal parity between oil and natural gas has been reduced to 6:1 resulting in a lag between a significant change in U.S crude oil prices and the adjustment of natural gas markets to that change. The Henry Hub averaged $5.3 million (MMBtu) in February up from an average in $2.71 million (MMBtu) in January. The U.S Energy Information Administration (EIA), predicted February’s figures to average at $2.98 (MMBtu) which was much higher than the actual $5.3 million (MMBtu) figure. Goldman Sach’s predict that US oil prices could hit $100 in the coming years, oil as of the 5th of March 2020 stands at $65 and as there is a correlation between natural gas and oil, natural gas is likely to move up.

There continues to be a debate on fracking and the environmental impact of fracking on the environment versus the short-term benefits of surplus of energy. The transformation of the global economy to a more environmentally friendly and electric environment could cause a drop in consumption of natural gas in the long run. BP predict that world oil demand is likely to peak in 2030 therefore we could see a shift to renewable energy which could eventually drop non-renewable energy prices.

Although increase in supply of shale gas and shale oil is a threat to natural gas prices in the long term, the increase of the Henry Hub index and U.S oil prices indicate that natural gas could potentially increase. The following image outlines the technical perspective on natural gas (NG1!).