Monday, June 21, 2010

Natural gas rebound

Natural gas prices have been extraordinarily volatile over the past 15 years, and the recent experience is no exception—at today's $5.12, prices have more than doubled since last September, yet they are still less than half what they were in 2008. I don't pretend to understand much about this market, but I note that the recent rally may be due to hedge funds that are being forced to buy back their short positions. Presumably they thought that massive new gas discoveries would combine with a weak economy to keep prices depressed. Commodity price speculation can cut both ways, as those who were betting on deflation have now learned.


Benjamin Cole said...

Natural gas prices dance to their own tunes, and have a weak linkage with the broader economy and Fed policy. It is a global market, so what the Fed does is much less important than global supply and demand.

It is also a market in which one-half of futures have been controlled by one hedge fund (Amaranth), which settled charges it had manipulated prices.

The good news is shale gas, of which the USA has epic supplies, as in 100 years worth and still counting, Extraction techniques are still improving.

For consumers, the good news is that supplies apear to be abundant for decades to come, so there should be a roof on prices. We may see more and more CNG fleet vehicles in the future, and maybe even private cars.

Benjamin Cole said...

BTW, read in the WSJ today about a global grain glut. This should put downward pressure on some commodities--another example of how global markets go their way, not so much influenced by the Fed.

Douglas said...

Shale gas has many problems associated with it. Pollution of drinking water aquifers may be the chief short term one, but another is the rapid peak in production noted in gas wells. The irony of improved extraction technologies is that the wells/fields go into decline more rapidly than in the past.

100s of years is probably an exaggeration, particularly if we attempt to support BAU on the back of natural gas.

These are a couple of informative posts from The Oil Drum about shale gas that I hope you will find useful.

John said...

Verizon (VZ-NYSE) is reporting that they will convert 500 vehicles (vans) to CNG.

If it makes economic sense to VZ it should also make sense to thousands of other companies.

Many big energy companies are taking stakes in US natural gas properties. NG can move the needle on energy independence.