With the oil price squeeze, flat North American natural gas production and a strong gas storage surplus, “a trading range of $5-7/Mcf is likely to persist,” for the next year or two, said energy consultant Stephen Smith in a new report.
The monthly report noted that the North American natural gas production decline of the past few years has “at least slowed to a crawl” and for the next two years, production should remain basically flat. Also keeping the gas prices higher is that expansions in domestic liquefied natural gas (LNG) capacity will not likely occur until 2006.
There is a “time-phased acknowledgement that both oil and gas prices have moved to a new and higher level — a level that does not appear to be changing substantially anytime soon,” Smith wrote.
Some “gas price slippage” is possible if oil prices continue to edge down or if summer power usage is less than expected. “Still, we don’t expect either the oil price correction or the gas price correction to be severe and still view the [exploration and production] E&P sector to be a good investment at current levels.”
Smith wrote that “oil, the key competitive fuel for North American gas, has understandably been priced over the past year to reflect a tight and nervous global equilibrium in which OPEC was known to have ‘little spare productive capacity.’ But exactly ‘how little’ was not clear, nor were OPEC’s pricing objectives. Some of this fog is slowly lifting.”
Smith also reviewed the state-by-state gas production data collected by the Department of Energy, and noted that the fastest growth region is Wyoming/Colorado/Utah, “which has doubled production over the last eight years.” The largest producing region continues to be Texas/New Mexico, “which has managed to hold production steady (even a slight upward trend is visible for the last two years) by developing new plays such as the Barnett Shale to offset the decline of many mature fields in the region.”
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