Tuesday, March 17, 2009

The U.S. Version of OPEC? - Natural Gas Companies

Over the past number of months, the Organization of Petroleum Exporting Countries (OPEC) has been cutting the rate of oil production in its countries to try to put a "floor" on the price of oil. At their most recent meeting, they decided not to cut any further production, but to try to make sure the member countries stayed within their production quotas.

During the past six months, the U.S. and the world has pressured OPEC to not cut production too rapidly since the global slowdown has caused a reduction in demand. If OPEC were to continue to try and keep the price of oil high (as some member countries want - namely Venezuela and Iran), then they would be compounding the economic issues. Saudi Arabia (the backbone of OPEC) has tried to balance the global economic issues while keeping the price of oil steady.

Now, we move to the U.S., and last night, Eddie sent me an article detailing how 45% of all natural gas rigs in the U.S. have ceased production since September. The energy companies that control these rigs just capped them for the moment.

Last July, natural gas hit a high of $13.22 along with all of the other commodities, then as energy prices cratered last year, natural gas followed along. Currently, natural gas just hit a multi-year low of $3.75, and this low has put increased pressure on the exploration and operation on the companies. In fact, Devon Energy and Chesapeake Energy recorded a combined loss of $7.68 billion in the most recent quarter. The vast majority of this came from the devaluing of properties that produce oil and gas.

These companies do not have formal meetings like OPEC to discuss production quota, but they do follow the market prices and know their operating costs. When the price of natural gas drops to where it actually costs them money to pull it out of the ground, they have a problem.

This reduction in production means that the price of natural gas should start to climb for both variable and fixed rates over the next year. With The Fed predicting a positive GDP in the 4th quarter, demand for energy should start to rise which coupled with a reduction in production and supply will definitely increase the price of natural gas - some analysts are predicting more than $7 from the current $3.75.

The chart below is of the average variable and fixed rates of natural gas in Georgia from July 2000 to March 2009. In 2004, the Georgia Public Safety Commission (PSC) changed the information put on their website to display a "apples to apples" charge. It makes it a rather large increase, but I know it tries to balance the rates to allow everyone to compare them versus just the price per therm.

Anyway, what is interesting about the chart is the rather flat line of the rates prior to Katrina. After Katrina, the rates are much more volatile. There are various reasons for this change - weather predictions (hurricanes), rise in demand, fall in demand, etc.

While most people do not do anything other than just pay their monthly natural gas bill, this may be a time that you look to lock in a fixed rate for the next 12 months. Obviously, in the summer months your bill will go down no matter what, but the low price you lock in now would take you through next winter.

Call your natural gas provider and check the rate. According to the PSC website, it should be somewhere around $0.86 per therm. This is the lowest price per therm since 2003.

--- Note ---

I did not want to get into this too much in the above post, but last year there were several huge finds of natural gas reserves in Louisiana and the Dakotas. They are still there, but until the price comes back to make the operations profitable, they will just continue to sit there.

One positive note is that U.S. has one of the largest reserves of natural gas in the world. If the U.S. transitions to natural gas over the new few decades, our reliance on outside sources for energy while drop dramatically. Clean, plentiful, and local - sounds pretty good for green energy.

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