Biggest reason why natural gas prices could surge

Ventura Commodities has come out with its special report on natural gas. The oil and gas industry have suggested that natural gas prices could rise sharply in coming years, says the research firm.

Since mid-February, natural gas prices have risen by a whopping 30 percent, accelerating a trend of generally rising prices that began after April of last year. While much of this recent surge in prices reflects stronger-than-expected seasonal demand for gas, there's one huge reason prices could rise significantly over the longer term — perhaps even triple over the next five years. U.S. natural gas market conditions
The recent increase in gas prices marks a departure from the weak pricing environment that has persisted over much of the past few years. As advances in drilling technologies allowed energy producers to coax massive quantities of natural gas from shale fields, an oversupply steadily built up, contributing to severely depressed prices for the fuel. In response, virtually every major U.S. energy producer curtailed gas drilling in favor of producing oil and, to a lesser degree, natural gas liquids. For instance, Chesapeake Energy, the nation's second-largest natural gas producer, reduced its gasdirected rig count from over 100 rigs in early 2010 to around 10 by the third quarter of last year. Similarly, EXCO Resources slashed its gas rig count from 23 as of year-end 2011 to 7 as of the end of October last year. But now, with gas prices above USD 4 per Mcf, some producers are either resuming or ramping up operations in gassier plays. For instance, Encana announced in February that it intends to increase its gas rig count in the Haynesville shale by three this year, citing the play's recently improved profitability. Yet others — including some of the lowest cost producers in the industry are waiting for prices to recover further before they rush back into gas drilling. For instance, Devon Energy, whose mainstay was once natural gas, said it doesn't plan on drilling for it at all this year. The company will instead be directing much of its capital budget toward drilling for liquids in the Permian Basin. Not surprisingly, the number of rigs drilling for natural gas slipped to near a 14-year low last month. In fact, the current gas rig count is almost a fourth of what it was at its September 2008 peak. But give it another three to five years, and these companies may be flocking to gas fields in droves, eager to extract as much natural gas as possible. The reason? Sharply higher prices brought about by lower-than-expected supply and higher-than-anticipated demand for the clean-burning fuel. Jeremy Grantham's view and Final thoughts Others outside the oil and gas industry have also suggested that natural gas prices could rise sharply in coming years. Investor Jeremy Grantham, co-founder and chief investment strategist at Boston-based investment firm GMO, suggests prices could triple over the next five years, as the current surplus gradually turns into a shortage. Speaking at the Richard Ivey School of Business value investing conference in Toronto earlier this month, Grantham argued that the current level of US natural gas prices — less than half what it is in Europe and about a quarter of the level in Japan — is unsustainable. This massive gap in global prices has lured a number of companies including petrochemical, steel, and fertilizer manufacturers back to the U.S., in hopes of capitalizing on cheap domestic energy. As these and other sources of demand grow, they will soon outpace supply and lead to a surge in prices, according to Grantham. Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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