Thursday, May 14, 2009

Oil and natural gas industry trends

The Dallas Fed has a very informative quarterly energy update for Q2 of 2009, which brings out many interesting dimensions to the global oil and natural gas market. Highlights of this report include

1. The price decline since the July 2008 peak of $147 per barrel has been unprecedented.

2. When the prices went up, the incentives got aligned, and the miles travelled declined. Now as the prices have started falling, the travel trends appear to be reversing.

3. The supply and demand has been closely aligned over the last two decades, with global excess capacity being minimal. The recent high prices had boosted investment plans and resulted in build up of excess capacity.

4. The recession and weak global demand has also pushed down natural gas prices to its lowest level in years. It has dipped below $4 per mmbtu, far below the level required to make exploration and extraction from many fields profitable.

5. As prices took off from 2004, investments increased and production and consumption started increasing from mid-2006. But the recession has had the effect of pulling down consumption and prices since mid-2008, though production remains robust. The fall in prices has caused a precipitous decline in oil drilling and natural gas exploration.

More on oil and gas industry here, here, here, here, here, and here.

Update 1
The Times reports of a sharp decline in the price of natural gas, to below $3 per thousand cubic feet from a peak of over $13 last summer, due to a drop in demand from factories and homes because of the recession, coupled with a big expansion of domestic production over the last few years.

Update 2
NYT report on the big find in natural gas exploration, drilling under black shale rock. Shale is a sedimentary rock rich in organic material that is found in many parts of the world and was considered of little use as a source of gas until about a decade ago, when American companies developed new techniques to fracture the rock and drill horizontally.

Update 3 (26/2/2011)

As recent trends indicate, natural gas and petroleum, though often viewed as substitute fuels, are at most times two different markets. In recent years, their prices have diverged continuously, with the price of natural gas now being less than one-quarter that of oil on an energy-equivalent basis. There are atleast three reasons for the divergence.

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