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Gas industry

Natural Gas Market Plagued by Bubble and Supply Glut

Strategic Insights

— 2 min read

Unseasonably warm weather, increased output by domestic gas producers, and enhanced storage and transmission flexibility due to deregulation have created a supply glut in the natural gas market, causing prices to plummet. The current market situation is often compared to the gas bubble of the early 1990s, with many industry observers predicting that it will take at least two years for the surplus to be absorbed. The bubble has led to low natural gas prices, with Gulf Coast delivered-to-pipeline prices averaging 12-14 cents lower than in 1994.

Key Takeaways:

  • The natural gas market is experiencing a supply glut due to unseasonably warm weather, increased domestic production, and enhanced storage and transmission flexibility.
  • The Gulf Coast delivered-to-pipeline prices for 1995 are likely to average 12-14 cents lower than in 1994.
  • Industry observers predict that it will take at least two years for the surplus to be absorbed.
  • The current market situation is often compared to the gas bubble of the early 1990s.
  • Rising domestic production, increased imports from Canada, and greater pipeline and storage flexibility have created a new supply glut.
  • Abnormally warm weather has muted the call for gas for space heating, which generally represents 10%-12% of annual gas demand.
  • The natural gas liquids (NGL) market is bullish, allowing excess natural gas to leak onto markets.
  • Susan Harkins Bertsch of Bonner & Moore Associates Inc. notes that demand and profit margins for raw natural gas derivatives have jumped since the first half of 1994.
  • Alan Gaines of Gaines Berland Inc. has "buy" recommendations on small producers Lomak Petroleum Inc., Panaco Inc., and Comstock Resources Inc.
  • Despite the dim outlook for gas prices, these companies' shares have been trading too low for their operational strength.

Statistics:

  • The price for a million metric British thermal units of Gulf Coast delivered-to-pipeline natural gas is 12-14 cents lower than the 1994 price.
  • The total U.S. production of natural gas is approximately 54 Bcfd (billion cubic feet per day).
  • The utilization of deliverable capacity from U.S. wells rose to 93% and wellhead gas prices climbed above $2/MMBtu last year.
  • Demand for gas for space heating represents 10%-12% of annual gas demand.
  • The liquids market is considered bullish, with demand and profit margins for raw natural gas derivatives jumping since the first half of 1994.

Sources:

  • Purvin & Gurtz Inc.
  • Craig Whitley
  • Bonner & Moore Associates Inc.
  • Susan Harkins Bertsch
  • Gaines Berland Inc.
  • Alan Gaines
  • "U.S. Gas Price Outlook" article in the Washington Post.

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