After all this week’s conference activity we thought that a plane ride would give us a chance to disconnect for a while, but even at 30,000 feet we’re still thinking about the markets. This time, we weren’t the only ones, as we were seated on our flight next to someone with 35 years of experience in the oil and natural gas industry (who wishes to remain anonymous). We’ve talked about this market a few times recently, wondering what was in store, and our in-flight companion was eager to share with us his thoughts on natural gas prices.
While he doesn’t think prices can go much lower than they have recently, he also doesn’t see a sustained increase in price in the foreseeable future. (looks like it’s Mr. Anonymous versus Jeff Gundlach of Doubleline) As our plane companion sees it, oil and gas companies are viewing Natural Gas as sort of a home run play way down the line. In that light, they aren’t concerned with oversupplying the market right now. In his belief, they are really after the rights to drill for natural gas in areas where it’s plentiful into the very far future, and in many cases to keep the drilling rights to the land – they are required to set up wells. So, it isn’t a matter of profit, it’s about keeping a long-dated call option which gives them control over as much production capacity as possible when and if natural gas becomes more widely used and prices eventually do go up.
What’s more – he said many of the wells that are being built in order to stake a claim to natural gas reserves are at times left half-developed. (I supposed that covers the requirements to be active on the land they’re leasing?) These wells aren’t producing now because of low prices, but it would only take a price increase of a dollar or two from current levels, in his opinion, to change that calculation. So, production can quickly increase on the heels even small price increases, meaning we may be looking at range-bound natural gas for the foreseeable future.
It may all be pie in the sky (literally – we were on a plane), but it is an interesting take nonetheless, which gives a little insight into why and how supply and demand can affect market prices.
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