Price plunge continues to reshape energy market
The weather has been warmer than usual, sapping demand for gas and depressing prices further. Production has marched on since January, and gas storage has remained nearly full. The price for spot shipments of natural gas out of the Henry Hub in southern Louisiana averaged out at $1.88 per million Btu.
The declining price is part of a pattern that has played out since late 2008. Expanding onshore shale gas resources and a sluggish economy have pushed gas prices to new 10-year lows. And as the natural gas price decline continues unabated in North America, the price paid by Americans for globally traded oil has gone in the opposite direction, despite declining demand for oil and gasoline in the United States
According to the U.S. Energy Information Administration, the relative price difference between the two energy commodities has “climbed rapidly” in recent months. Gas is at near-record lows, and oil is at near-record highs. Spot prices for Brent crude oil — the major benchmark for Atlantic Basin oil — has gone up 19 percent during the past six months, from $103 a barrel in early October to nearly $124 at the end of March.
Over that same period, according to EIA figures, the price of U.S. spot natural gas declined 45 percent.
The widening gap is encouraging drillers to shift resources toward drilling for more oil. Some are also deploying rigs to areas rich in gas liquids, such as ethane and butane, which are sold at higher prices to chemical companies. Basins such as the Eagle Ford in Texas, the Utica in eastern Ohio and the Bakken in North Dakota are seeing more action than conventional natural gas fields.
Even as oil and gas producers are moving away from drilling for natural gas, the low price of that energy commodity makes it far more attractive than oil-derived products like distillate and residual fuel oil. Over time, that demand for natural gas could boost the price some and lure rigs back to the gas fields.
Energy analysts in recent weeks have continued to bang away at the idea that the United States is heading toward virtual energy independence, largely because of higher domestic oil production and declining U.S. oil demand.
Citigroup’s Edward Morse spoke before foreign policy experts in Washington last week, explaining his team’s conclusion that North America is becoming the new Middle East.
North America’s trend lines all point toward oil and gas production growth, Morse’s analysis says. “With no signs of this growth trend ending over the next decade,” said his team’s Citigroup paper published in late March, “the growing continental surplus of hydrocarbons point to North America effectively becoming the new Middle East by the next decade; a growing hydrocarbon net exporting center, with the lowest natural gas feedstock costs in the world, supporting thriving exports of energy-intensive goods from petrochemicals to steel.”
Energy analysts at Raymond James last week also picked away at data suggesting economic, societal and technological trends are driving down U.S. oil demand, perhaps for good. In the short term, U.S. Energy Department data and MasterCard sales data confirm about a 5 percent decline in gasoline consumption this year, noted the analysts, despite rising employment and consumer confidence.
“Regardless of whether the real decline this year is 3% or 6%, it is clear that U.S. oil demand is falling, and falling fast,” said an April 9 analysis by Raymond James analysts Marshall Adkins and Pavel Molchanov.
They said the long-term trend is supported by increasing fuel economy for cars, people driving less, a larger number of natural gas vehicles on the road and a bigger shift toward using more domestic natural gas for petrochemicals production instead of oil.