NG is headed to 5.50 or higher. Very few of the plays make sense at a price lower than that and the ones that do are actively being drilled. Watch what happens when supply rolls over and those Mexico exports come online. Then the LNG exports hit, Canadian Imports disappear, Huge Coal Plant retirements, Industrial demand way up, and a slow build in the transport sector.
The ROR on drilling for Oil/Liquids at 90 plus oil is vastly superior to drilling for 5.50 NG in most fields.
Plus you don't just turn on a faucet and ramp up production overnight. Most of the oil rigs are committed to multi-year contracts. It costs money to move them. It took 3 years to move away from NG to Oil, it will take at least that long to move them back to NG, particularly with 90 plus oil.
There will be little shift in CAPEX from oil to NG for the remainder of 2014 regardless of prices. Lets see if we end winter in the 1.2 to 1.3 tcf area as many expect. Some think it might end up at 1.0 tcf, that is probably a stretch.
Marcellus production will likely plateau this year or early next year with the other fields dry fields declining. Those Mexico exports are really going to tilt things. I'd prefer to see NG stay below 5.50 until late Q4 when 2015 CAPEX plans have been finalized, then let supply rollover and along with the Mexico exports, storage gets anialated.
Here is a thought to ponder: let's say next winter we exit storage with 1.0tcf in reserves, Mexico exports are up by 2.0 bcfd, supply is down by 1.0 bcfd, and there is additional demand build from utilities, industrial, and transport sectors. In such case storage gets completely drained within a year. And then, even before the end of the year, the LNG exports kick in.
Is my 5.50 NG forecast low? Will NG revert back to its historic norm of 10 to 1 with oil? Could we see some severe spikes in NG over the next few years?
Well the answer you know is that this scenario is already happening to some extent. Spot prices have already spiked to over $100mcf in some of the City Gate markets in the Northeast.
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