Predicting the Price (and Production) of Natural Gas

According to David Sterman, a 20-year investment analyst writing on the Seeking Alpha website, the commodity price for natural gas has likely bottomed out in the U.S. and will now slowly rebound. Natural gas is currently trading around $2.45 per thousand cubic feet (mcf). Goldman Sachs believes by the end of this year prices should be around $3.75 mcf, moving to $4.25 in 2013, and $5.50 in 2014.

How does the commodity price of natural gas affect landowners? It costs drillers roughly $2.30 mcf to drill, pipeline and sell natural gas, so if prices hit that level, production stops. As the price falls into the sub $3.00 range, drillers slow production, stop production, or shift production from dry gas (methane-only) areas to more lucrative wet gas (natural gas liquids) areas.

Here’s an excellent summary from Sterman to know how to read the tea leaves when it comes to the commodity price of natural gas:

As a rough framework:

  • A sharp drop in temperatures in the U.S. Northeast in the second half of this winter would quickly push gas above $3.

  • A drop in the rig count to around 725 or even 700 is probably good for another $0.50 move.

  • Further conversions in multi-fuel power plants from coal to natural gas is another clear, but hard-to-quantify catalyst.

  • And legislation that advances the opportunity for natural-gas powered vehicles could add $1 to natural gas prices.

Add it all up, and natural gas prices could be trading between $3.50 per MCF and $4.50 per MCF a year from now.*

The most recent natural gas rig count (as of Tuesday, according to Zachs and Baker Hughes) stood at 777, down 3 from last week and down for a third week in a row.

MDN has installed a convenient natural gas commodity price widget along the right side of every page so you can monitor prices. Remember, a price below $3 spells slow downs and shut downs in production. The higher the commodity price goes, the more likely drilling activity will increase.

*Seeking Alpha (Feb 2, 2012) – 3 Ways To Play The Coming Rebound In Natural Gas