Tuesday, January 3, 2012

The Messages Sent By $3 Winter Gas and $3 Plus Winter Oil

Gas and oil prices are sending strong, contrary messages to which attention should be paid.  Natural gas prices fall below $3 for a thousand cubic feet in the middle of the winter, but Brent oil remains at $109, with heating oil consumers paying more than $3 per gallon.  What does it mean?

Let's start with the sarcasm.

Shale gas is one of the great Ponzi Schemes of all time, is it not? I mean on December 30th natural gas hit $2.98, and the February Future price is $2.99. Then yesterday the French Oil Giant just became the latest sophisticated buyer in a long list to spend hundreds of millions of dollars buying into the Marcellus or Utica shales.  These low winter prices and continuing big investments must mean that the shale gas resource is not real, is inflated, right?

But don't expect the NYT ever to correct the message it sent by spreading far and wide the Ponzi scheme charge that fuels public misunderstanding.  Shale gas is as much a ponzi scheme as global warming is a hoax. Both charges should be ridiculed by serious people and news organizations, not coddled.

Low-priced gas will be a ferocious competitor for electricity generation market share during 2012, with gas gaining still more market share and coal losing it.  EIA projects a 4% decline in coal's share this year.

While gas is at bargain levels, oil is expensive.  On a rolling 12 month average basis, oil is close to its highest levels, with oil prices above $100 for a sustained period.  The threat of expensive oil priced in the global market to our economy and national security remains high no matter what happens with Iran in 2012.

The delinking of oil and natural gas price continues, with oil prices up about 10% and gas prices down about 30% in late December 2011 compared to late December 2010. Current oil prices pushed to $99 for West Texas Intermediate from $90 one year ago, but gas fell to around $3 from above $4 for a thousand cubic feet. The oil to natural gas price ratio that used to be 6 to 1 is now 33 to 1 or even higher.

US shale gas production and shale gas alone explains the delinking.

Shale gas now accounts for 34% of all US gas production and nothing demonstrates the size and reality of the shale gas revolution more strongly than below $3 natural gas. The price signal is one of great bounty.

Hign oil prices, however, are sending a message of strain, if not scarcity or danger. Oil supply remains challenged to meet the demand posed by 1 billion cars and booming India and China.

These strong price signals are a roadmap for a smart energy policy.  We will be watching in 2012 to see if policymakers grap the opportunity and avoid the peril ahead.

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