Near record low oil & natural gas prices “When will the oil & natural gas market stabilize?” is not a question that can be answered easily. A variety of factors over the past few years have driven market prices to historic lows; recently, these factors have been compounded by an abnormally temperate winter in the US. January’s Henry Hub Natural Gas NYMEX prices recently hit the sub $2.00 mark, while oil is trading in the low to mid-$30 range, resulting in a 14-year low for natural gas and a 7-year low for oil. These low prices may bring a smile to consumers’ faces, but producers are just hanging on and trying to survive the fall to the bottom, which they hope is near.

Historic Nat gas and oil chartSource:  Quandl and CME Group

So, how did we get here? Over the past several years, advanced drilling methods and technologies emerged, allowing the US to access oil and natural gas that was previously not economically feasible to extract. To illustrate the impact of this, the US shifted from being on the verge of importing Liquefied Natural Gas (LNG), to having an oversupply of natural gas available to export. Further, oil production in the US expanded so quickly that it resulted in record oil surpluses, which have applied further downward pressure on global oil prices. Since oil is priced on the global market, its price is strongly affected by global economic and geopolitical factors. The three primary drivers of the global oil surplus and subsequent price decline are:

  1. Reduced global demand – led by stagnating growth in China and other developing countries
  2. Drastically increased oil production volumes in the US
  3. Steady output by Saudi Arabia and other OPEC countries (Iran also could compound the supply imbalance in the near future).

While the global oil market could have absorbed one (or even two) of these drivers, the impact of all three has been devastating to global oil producers. Recent discussions between OPEC and Russia about maintaining production volumes have led to a stabilization of oil prices. It remains to be seen whether Russia and OPEC have the discipline to stick to their agreement. Conversely, natural gas is priced on a national basis; hence, the US natural gas market is affected by domestic factors including weather, consumer usage, pipeline capacity/availability and the number of operating production rigs. The three primary drivers of the domestic natural gas market glut and record low prices are:

  1. The rise in fracking to extract natural gas from previously unavailable reserves
  2. The abnormally warm winter to date has reduced the normal drawdown of US natural gas surpluses
  3. Stable US natural gas production, despite decreases in the number of operating rigs.

Overall, the doubling of US production for both natural gas and oil has impacted the markets greatly and has been a major contributor to prices falling two- to three-fold over the past few years. If production is slowed, a balancing of the market and leveling off of prices could occur. In our next O&NG blog post we will explore what could happen to oil & gas prices throughout 2016 and beyond. See Part 2: Keep a Look Out for These Natural Gas Price Indicators in 2016 Check out our brand new Natural Gas Market Report coming this summer. Learn more about our experience in energy.

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