Financial Times
Mild winter adds to pressure on US gas

Wednesday, January 11, 2012

With prospects for significant demand growth years away, analysts and energy hedge funds have turned their attention to supply in an effort to determine whether prices will fall further. The picture is no more pretty for the bulls.

By the end of the so-called “injection season”, when gas is shifted to underground storage for winter use, inventories could test working capacity of 4.103tn cu ft, analysts say. This would drive down spot gas prices as it did in September 2009, when they plunged as low as $2.409 per mBtu.

“The message is: we haven’t set the price floor in the near term,” says Sheetal Nasta, analyst with consultants Bentek Energy. “The low is still to come.”

Prices have already fallen so far that they are approaching the marginal cost of production. This is usually a sign that new supplies will start to taper off. Yet while output growth flattened late last year, there are several reasons why supply will not wane.

Many gas wells also produce higher-value liquids such as petroleum. With oil at $100 a barrel, drillers can afford to keep pumping out what is called “associated gas”. In some oilfields without pipeline connections, drillers simply burn off gas at the wellhead.

“It’s just a byproduct,” says Ms Nasta. “The price that you are getting for the gas may be irrelevant to your decision to drill or not.”

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