Although a shale-produced natural gas surplus remains, it is at a lower level than many expected and thus a couple of drivers could send prices back into a period of volatility, according to Jim Duncan, chief analyst and commodity market strategist for ConocoPhillips in Houston.
Duncan explored "What's Next for the Energy Space?" as a second-day keynote speaker at the LDC Forum: Rockies & West conference Wednesday in Los Angeles. Generally, he labeled himself as "bearish" on the natural gas market.
Placing the current level of U.S. oversupply at 2.75 Bcf/d, he characterized this as far lower than he and many others in the industry had predicted early in the year, expecting the number to be 4-6 Bcf/d, given the continuing shale gas boom.
"This is what scares me; if you stack up all the gas demand pictures and do the pluses and minuses on imports, you get 2.75 Bcf/d oversupply," Duncan said. "The talk of shale makes everyone in the country think that we are way oversupplied. I have heard numbers of 4 Bcf/d and 6 Bcf/d, and the reality is that we are not exactly that much oversupplied. It would not take much to throw us out of balance.
"The signposts have been appearing in the last several months," he said, noting the continuing shift of drilling rigs from shale gas to oil work.
"The rigs have been steadily moving away from the gas production toward oil, and that is a problem if you think you're going to be oversupplied. So, to me, this seems like 1998-99 all over again."
With the recent past interest in gas drilling, the nation has become that much more dependent on natural gas, which was demonstrated this past spring, Duncan said, when nuclear plants went down (after the Japanese tsunami). Gas prices shot back up.
Duncan said there has been a decline of about one gas rig each week, while about eight oil rigs are being added weekly with the trend remaining stable through the most recent four-month period this year.
"In the last 12 months when we were worrying about nuclear and other issues it had a direct impact on natural gas; prices went up, but it wasn't noticed as much because the prices still stayed relatively low," Duncan said. "I believe natural gas-fired power is going to be one of the waves of the future."
Another signpost is hydraulic fracturing (fracking), he said. If you take away fracking, you go back to depending on traditional drilling. People need to remember the last time we were focused on that source of production (2006-07) was the precursor to some widely volatile price swings that took the nation up to $14 gas at the midpoint of 2008, Duncan said.
As gas supply has outpaced demand over the last three years, thanks to shale gas coming to market, price volatility has significantly declined. Looking at Nymex front-month natural gas futures data, annualized 20-day historical price volatility has dropped from as high as 80% during October 2009 to as low as 24.2% earlier this month.
Duncan is also concerned about the trend to have everyone switch to natural gas liquids and oil because of the low gas prices. "If everyone switched, for gas and oil to be equal a barrel of crude would have to be about $16 to $17/MMBtue," he said, noting that is the crossover point for crude oil.
"The reality is that the more attractive product is anything associated with crude oil. And if we switched, that will at least be another signpost we put out. And the reality is that is what we see. I speak to producers and that is what they tell me they are doing incrementally."
Another "reality," he added, is that "natural gas prices can be volatile -- all energy can and will be volatile."