Gas prices remain depressed. No getting around that. The question beckons to be asked, “Is natural gas depressed or is this going to be the going rate for the future?” This is a very timely question if you want to buy gas royalties from royalty owners who are living beyond their means and are willing to sell off to cover their debts. Is it worth it? Should you gamble on the come?
My analysis concludes low natural gas prices are here to stay for 4-8 years.
Let us take the following information points:
- Gas Storage
- Current and Past Gas Prices
- Gas Production increase due to Fracing
- Economic Conditions
From the gas storage graph below, notice that we are well ahead of normal storage. That means we are simply producing too much natural gas. Gas, unlike oil, is virtually non-exportable which means it is more susceptible to price swings than oil. After all, if we don’t need that oil, Europe could use it and the transfer cost is minimal on the price tag.
So the US economy is down. More importantly, the US manufacturing economy is down and the prognosis is bad. From the DOE, they provide a good look at the end use of gas, see the chart at http://205.254.135.24/dnav/ng/ng_cons_sum_dcu_nus_a.htm and you will notice 1/4 of the nation’s gas goes to power and a 1/4 goes to industry.
With industry down and huge reserves of gas available on demand by fracing, there will be a glut of gas until industry can get back on it’s feet. Then the new fracing technology will be able to deliver an overabundance of gas for decades. I think there has been a dramatic shift in the natural gas commodity world that will keep gas down for a good long while. Maybe long enough to see a major switchover in car engines from gasoline to gas.
So overall, natural gas prices are down for the count. If you are buying gas royalties, be sure to factor in $2-3 gas for 10 years. Then hope I’m wrong.
