In a world of abundant North American natural gas and a new round of oil shocks, the parting of oil and gas prices has grown so wide (25-to-1, give or take) it's as if the two never knew each other. Were they ever really linked, asks one analyst; while another notes that gas appears to have fallen out of step with the broader commodity basket.
Deutsche Bank Research analyst Josef Auer pointed out in a note Wednesday that industrial and precious metals as well as agricultural commodities have been lifted by the global economic upturn.
"In contrast, prices for energy inputs are moving in remarkably different directions," he wrote. "True enough, crude oil broke the US$100 threshold again in early February 2011. Natural gas, however, is no longer following its traditional pattern. A case in point is the spot price of U.S. natural gas, which is still considerably below its longer-term average. The reason for this special development is the new gas glut in the U.S., which is the result of new [horizontal drilling and hydraulic fracturing] technologies.
"The link between oil and gas prices will make no sense in [the] future."
Further clouding the matter is the prospect of liquefied natural gas (LNG) exports from the United States, Auer said. "If gas exports were possible [from the U.S.], this would be another great challenge for all de facto price links to the oil price that are still in place in Europe. U.S. gas exports may prove to be the final nail in the coffin of the oil price link."
But was there ever a real link to begin with?
"We've never been big oil and gas parity guys because there's really not a lot of linkage on the demand side," David Pursell, head of macro research for Tudor, Pickering, Holt & Co. Securities Inc. (TPH), told a Houston audience Tuesday when he was asked if gas and oil prices would come together again.
"There's no reason for oil and gas to trade in parity unless you see a significant amount of transportation demand from compressed natural gas [CNG] vehicles," Pursell said, noting that it wouldn't take much.
"Let's assume you converted all gasoline-powered vehicles to CNG in the U.S.; that's 10 million bbl of gasoline a day," he said. "Let's assume thermal efficiencies are the same between a gasoline and a CNG engine; that's 60 Bcf/d in incremental demand. That doubles U.S. consumption. We're not going to do that, but what that says is, 'I won't need a lot of CNG vehicles to move the needle.'"
And then there's the potential for the export of North American gas as LNG, which is being pursued in the Gulf of Mexico by two projects and on the west coast of Canada by one (see Daily GPI, Dec. 16, 2010). "To reap these benefits [of exporting], the gas would have to be transported to places that are likely to develop unsaturated demand and/or where prices are relatively favorable," Auer said. "As a result of the gas glut, prices are expected to remain relatively flat in the U.S."
Bad news if you're a producer -- or is it?
EXCO Resources Inc. CEO Doug Miller told financial analysts Thursday during a conference call that he wouldn't mind if gas prices stayed down or a little while. "We kind of think $3.50-4.50 for the next 12-18 months is where we'd like it to be just because I think we'll be able to make some more acquisitions," he said.
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