Natural-Gas Price Is Unlikely to Flare Higher

Saturday, July 23, 2011

This was supposed to be the year that low natural-gas prices prompted a reduction of supplies. Analysts have long said that a sustained period of gas priced below $5 per million British thermal units would slow the boom in drilling, curtailing output. So far, the opposite has occurred, leading to the inevitable conclusion that natural-gas futures aren't going to gain much, if any, ground above the $5 mark. On Friday, natural-gas futures for August delivery ended at $4.399/MMBtu on the New York Mercantile Exchange, down 3.2% on the week.

Production from U.S. shale formations, deeply buried rocks, came onto the scene a few years ago and sent prices tumbling. Production in the lower 48 states reached a shale-era record in March, and topped that mark in April. In response, the Energy Information Administration says it expects 2011 output to total 23.8 trillion cubic feet, which would shatter the U.S. production record set in 1973.

Indeed, the rush to plumb onshore reserves for crude is yielding more gas than some distribution systems can handle. Each day in April, for example, producers in North Dakota's Bakken shale formation flared about 100 million cubic feet of gas that local pipelines and processing facilities couldn't handle, say analysts at Bentek Energy. That gas, enough to fuel 500,000 typical U.S. homes a day, will eventually hit the market when infrastructure construction catches up to drilling.

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