Is the Shale Rush Almost Over? One Analyst Says Yes

Jack Barnes, writing for Money Morning, analyzes the price of natural gas and why it’s so low—and what it ultimately means. He says that numerous shale plays in the U.S. do contribute to an overabundance of supply. But the real culprit, according to Barnes, is that major drillers are going after natural gas liquids (NGL), which can be used in a variety of ways. NGL are closely aligned with the higher price of oil and more valuable. In the process of going after NGL, “dry gas” (or methane) is recovered in the process too. It is the scramble for NGL that leads to an oversupply of methane, and that oversupply keeps natural gas prices low.

Barnes says until the U.S. starts exporting more gas, which won’t happen for at least a few more years, prices will likely remain in the basement. Prices are so low that he considers the “shale rush” about over.

He concludes his analysis with this long term outlook for natural gas:

I don’t expect to see a clear trend change in natural gas prices until 2013 or later depending upon the buildout of U.S. liquid natural gas export capacity.

The U.S. government has received a growing list of requests from LNG import facilities, to allow them to be converted into LNG export facilities. These conversion projects will start to come online in 2015. So far there have been plans submitted to export the equivalent of 17% of the United States’ daily natural gas production, but for now that production has to sell within the United States – or not.

If all of these facilities are built, the United States could be the world’s largest liquid natural gas exporter by 2020. Just a few years ago the United States was projected to be the largest consumer of liquid natural gas by 2020.

Needless to say, the swing from one extreme to the other has been staggering.

In the meantime, smart investors will stay out of the way of the Widow Maker [his term for a chart showing the sharp declines in NG contracts over the past two years]. Expect natural gas prices to stay low for 2012 and beyond.

It is also time to start considering the impacts that a natural gas glut will have on the companies providing drilling supplies to the exploration and production (E&P) companies.

Some high-flying stocks in the O&G service sector will be negatively impacted when the rush to drill and frack a shale well is over. The golden days of the shale rush are just about over and with that, a return to gravity for some of these high-flying stocks.*

Read the rest of his analysis by clicking the link below.

*Money Morning (Jan 16, 2012) – 2012 Natural Gas Price Forecast: Why to Avoid the "Widow Maker"