Schork Oil Outlook: Gas, Gas, Everywhere…
Natural gas production in the Lower 48 U.S. has now increased in 9 of the first 11 months of 2010 per the government’s latest numbers, EIA-914.
Production increased 1.1% or 0.71 Bcf/d in November to a record 66.52 Bcf/d. The EIA notes that large gains in Louisiana, 5% (think Haynesville shale) and Texas, +1.2% (think Eagle Ford shale) were responsible for the bulk of the gain. These gains were enough to compensate for a 3.9% decline in the Federal Offshore Gulf of Mexico.
Got that? As Phil Esposito (New York Rangers broadcaster circa 1981) would say… for you kids watching at home… gas production continues to rise despite Chicken Little prognostications from Wall Street (going on three years now) regarding producer’s alleged inability to produce in the current price environment.
Thus, counter to Wall Street’s siren song to investors (aka, commissions), producers are still producing. As The Schork Reporthighlighted a few weeks ago, the ratio between NYMEX crude oil is currently at 2.1/1 and the ratio between ICE Brent crude oil is a whopping 2.3/1…. i.e. 1 contract of crude oil in New York or London can buy more than 2 contracts of natural gas at the Henry Hub. Owing to the massive decoupling between liquids and gas values, the ratio between propane and natural gas is around 1.3/1 (the average over the last five years is closer to 0.76/1. That translates into a frac spread (gross margin between LPGs and natural gas) of around $10 an MMBtu.
Given that the propane frac averaged below $6 per MMBtu over the last five years, it can go without saying that demand for production from gas processors is stout because the whole is not greater than the sum of its parts. To wit, marketed production rose by 1.1% to a record 63.5 Bcf/d.
Bottom line, natural gas is cheap, but given the economics, that is no reason to buy it.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.