The biggest mistake in energy price forecasting is projecting current prices forward

value chain gas and power ENI gas-power-value-chain

Low natural gas and world oil prices are having a devastating effect on the energy industry.  The best cure for low energy prices is low prices!

Low prices force producers to take action to reduce production, cut expenses and rationalize their market position—or else.  We see that market behavior at work today as companies and countries adapt to these new realities.

Oil and natural gas prices are driven by the boom and bust nature of market fundamentals but much of the volatility we experience is the result of market psychology, fear and geopolitics.

Today’s low oil and gas prices will inevitably go up as the pain of revenue loss forces cutbacks in drilling and production to bring supply back into balance with expected demand.   The best medicine to cure market psychology, fear and geopolitics is transparency and real competition. Over reaction in the boom and bust swings is common especially when the tough love of low prices results in cutbacks in production that are too severe.  When this happens prices spike as shortages are perceived and the fear of being left behind speeds a new drilling and production response.

But how long will it take for energy markets to get back to equilibrium and grow again?

It depends!

Natural gas has earned its reputation as one of the world’s most volatilely priced commodities. Technology made it economic and practical to chill gas into a liquid and transport it on ocean scale vessels to far off locations where it is re-gasified and injected into the local pipeline system.  Expanding the scale and scope of natural gas use has been a real success story in the energy and environmental revolution.

Low natural gas prices have profoundly hurt coal especially when onerous new regulations the government has sought to impose increase market fear.  But those same regulations on fossil fuel emissions also have unintended consequences since renewable energy from wind and solar need backup from dispatchable sources like natural gas.  Thus opposing fracking and pipeline construction can prevent cleaner natural gas from supporting the faster transition to more renewable energy sources, lower emissions and more distributed generation.

The shale revolution transformed the natural gas market from a regional to global scale traded commodity. Technology advances in 3D seismic imaging, horizontal drilling and hydraulic fracturing turned the US from a net energy importer into an energy superpower expanding our domestic proven fossil fuel reserves profoundly. Now the US has begun to export liquefied natural gas as LNG to expand the market reach of American energy products as both LNG and natural gas liquids expand their reach. Whether this is good news or not depends upon where you are in the energy value chain.

Plentiful supply of shale gas has driven down US gas prices to below levels of other global markets where natural gas as LNG continues to be pegged to oil prices.  But oil & gas from Russia, Qatar, Algeria, Australia and other places compete with the US for market share in global gas markets.  Shale development in China may reduce its import needs.

In the last boom and bust energy business cycle before the shale revolution when we worried the US was running out of natural gas, the response was to OVERBUILD LNG regas facilities to accept more imports of foreign LNG.  Today less than 20 years later we are doing the OPPOSITE building liquefaction and LNG export facilities to send American gas around the world.

The key lesson from our boom and bust experience is markets will always seek equilibrium as the competing forces of supply and demand play out—but there will be volatility where things that go bust come back to create a booming regrowth as the circle is repeated.


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