Natural Gas Prices at an Unsustainable Low
Two main concerns for investors are overblown.
Dave Meats: After an updated look at supply costs, we have lowered our marginal cost estimate for U.S. natural gas to $2.80 per thousand cubic feet, from $3 previously. But that’s still pretty bullish at current prices--the futures curve is currently averaging only $2.60 per mcf in the next four years. In other words, we think U.S. natural gas prices have fallen to an unsustainable low.
There are two main concerns for investors, and we think both are overblown. First, there’s the idea that associated gas from oil-directed drilling in oil plays like the Permian Basin is flooding the market and pushing down prices. It’s true that associated gas production has grown tremendously in the last 10 years, but it still only accounts for about 25% of all U.S. supply. And there was a 25% decline in oil rig activity in the U.S. last year, which caps associated gas growth in the next year or two. So we still need gas-directed drilling in the U.S., and we don’t think current prices offer enough incentive for producers.
Dave Meats, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.