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Welcome Back to 1976

By Evelyn Teel and Jim McDonnell

Our last blog post discussed the trend of decreasing natural gas prices in the 2010s (please find that blog post at this link: https://avalonenergy.us/2020/01/down-down-down-energy-prices-in-the-2010s/). What does the trend in natural gas prices look like if we go further back in time?  To answer this question, we extended our look-back to 44 years. 

The graph below shows natural gas prices (monthly average) over the 528 months spanning January 1976 through December 2019. Prices have fluctuated significantly, with particularly big run-ups during the early 2000s. Natural gas prices have been as low as $0.54/mmBtu and as high as $10.79.  Overall, prices have trended upwards. These prices are in “nominal” dollars, meaning dollars of the day, and are not adjusted for inflation.

If we sort the 528 months of price data from lowest to highest, we can see that today’s prices are significantly below both the median and average prices of the full dataset. This means that for the majority of the past 4+ decades, natural gas prices have been higher than they are today.

As indicated, the two graphs above show prices in nominal dollars. When we adjust for inflation, the story changes rather dramatically. The following two graphs show the pricing data in “real” dollars, specifically adjusted into today’s dollars.

Adjusted for inflation, over the 528 months, the low price was $1.87/mmBtu and the high was $13.33/mmBtu. Overall, inflation adjusted prices have trended sideways.  

Looking at the December 2019 monthly average of $2.22/mmBtu, it is very nearly the lowest natural gas price since 1976, adjusted for inflation. More specifically, it was the 8th lowest of all 528 months under review.

The graph below shows nominal and real natural gas prices plotted together. Viewing the data this way highlights the effects of inflation.

It is remarkable to note that, in real dollars, natural gas prices are basically the same as they were 44 years ago – and they are significantly lower today than they have been for most of that period. Plus, not only are prices low today, they are expected to remain low for the foreseeable future. Appending the natural gas forward curve (which represents the market’s view of pricing five years, and even further, into the future) to the historical real dollar price graph shows that prices are expected to remain flat. 

So, when a friend refers to 1976 as a wonderful time of low natural gas prices, trading at around $0.54/mmBtu, tell them, adjusted for inflation, that is $2.50/mmBtu in today’s dollars.  With current prices as of this writing now below $2.00/mmBtu, for natural gas buyers, as Carly Simon sings, “…these are the good old days.” For natural gas producers, not so much.        

The natural gas market has seen some remarkable changes since 1976, driven by technological advances, economic fluctuations, and global political considerations. It is also increasingly sharing the electricity-generation space with a range of competitors, particularly a rapidly-expanding volume of renewables such as wind and solar. It is an exciting time, as the US is generating increasingly clean electricity and building a more sustainable energy system. We can be relatively certain that the energy market in 2064 won’t much resemble the one today, and it will be fascinating to see which factors most drive change in the future.

Interested in learning how you can benefit from today’s low energy prices? Call or email us today and we’d be happy to help you explore your options.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at info@avalonenergy.us

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

All images copyright 2020 Avalon Energy® Services LLC

Copyright 2020 by Avalon Energy® Services LLC

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These Are Days To Remember

Natural gas prices are really, really low in the wholesale market.

The graph above shows daily natural gas prices traded at the Henry Hub, in dollars per million British thermal units ($/mmBtu), from January 1997 to today.  Prices on the graph are in nominal dollars, not adjusted for inflation.  Natural gas prices have exhibited a great deal of volatility.  The average price over this period is $4.60 per mmBtu and the long-term trend is upward sloping as shown by the red line.  This fits well with the widespread perception that energy prices always go up.

This graph shows prices on a monthly basis, which smooths out some of the volatility, but not much.  Prices on this graph are in real dollars.  Specifically, they have been converted to today’s (2015) dollars.  After adjusting for inflation, the monthly average price is $5.53 per mmBtu and the long term trend is downward sloping.  In other words, in real dollars, natural gas prices have declined over this period of time.

Why have prices declined?  In a few words—the shale gas revolution.

Until 2008, the contribution of shale gas production to total US natural gas production was small (see green area above).  Since then, total natural gas production has risen dramatically.  Even more dramatic is shale gas’ contribution to total US natural gas production which today is greater than 56%.  The Energy Information Administration’s 2012 “Outlook” projected this level of contribution on the part of shale gas would not happen until 2035.  Twenty years sooner than predicted, here we are.

Using December 2008 as a demarcation point and splitting the data into two segments, we see two very different worlds.  From January 1997 to December 2008, natural gas prices rose by more than 19% per year.  Since then, they have fallen 5.7% per year.

Other commodities are experiencing declining prices recently.  Iron ore and copper prices, for example, have dropped dramatically, primarily because of declining demand in China.  Natural gas prices have declined in the face of rising demand.  This is truly astounding.

This frequency diagram shows how today’s prices compare to historical prices (all in real dollars). Natural gas prices are really, really low.

But, there is more to this story.  First some background.

During World War II, two pipelines (the Big Inch and the Little Inch) were built by the US government to transport crude oil from the Gulf Coast to refineries in New Jersey. The pipelines allowed the oil to be transported by land, rather than by sea tankers (which were exposed to German U-boats) as had been the practice.  After the war, these pipelines were sold to commercial enterprises and transformed to transport abundant and low cost Gulf Coast natural gas to Northeast industrial markets.  Subsequently, other pipelines were built to move low cost natural gas from the Southwest to the pricier Northeast and Midwest markets.

The difference between the prices of a commodity at two different delivery points is known as basis.  If Gulf Coast natural gas at the Henry Hub sells for $5.53 per mmBtu and sells for $6.53 in New Jersey, the basis differential is $1.00.  And this is the way it was for many decades—natural gas in Northeastern markets trading at a basis (compared to the Henry Hub price) of a dollar or more.  But things have changed.

Because of the immense increase in volume of natural gas being produced from the Marcellus Shale, natural gas for delivery in Pennsylvania and New York State, for example, sells for $1.50 or more below the Henry Hub price. This is a negative basis.  Today, with natural gas trading around $2.60 per mmBtu at the Henry Hub, natural gas can be purchased for a little over a dollar per mmBtu in Pennsylvania and New York.

For energy buyers, these are days to remember.  For natural gas producers, not so much.

Evelyn Teel contributed to this article.

 

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.  Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.  Copyright 2015 by Avalon Energy® Services LLC

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