Natural gas future commodity prices

Anyone connected with gas drilling in the U.S. knows about the market swing from $10/Mcf in January 2001 to $2/Mcf in January 2002, and the resulting major drop in active rigs. Speaking on this subject at Cambridge Energy Research Associates' (CERA) annual conference in Houston, February 11-15, R. Skip Horvath, President of the Natural Gas Supply Association (NGSA) said, "We should not mistake the calm in today's natural gas prices as anything more than the low side of our normal business cycle. There are two features to the production business cycle that are important: first, since the early 1990s, each price increase and decrease has been a little higher than the previous cycle. Second, the high-low price spread has increased. Both these trends underscore the underlying volatility.

"The reason for the volatility is simple: we are a commodity market and volatility is inherent in competitive commodities. But the long-term reason for the swings is more fundamental--supply. The fields where we drill are old, yielding less and less gas. Today, we have to produce 6 Tcf/year of new supply just to stay even, much less meet growing demand. We can produce the gas required to meet market demands, but we must have changes in government policy to plan for the future."

"Our industry cannot move on a dime," Horvath added, "Producing gas takes time, even years, when we are not using existing wells. To meet future market demand, we must have improved government permitting in gas-prone federal lands to ensure the most economic supply; and we must be allowed to explore for new fields in areas where we currently are restricted. These two issues are our industry's biggest challenges."