Even As Natural Gas Players Throw In The Towel, Goldman Comes Out And Says Prices Are Unsustainably Low

We just posted this story from our partners at OilPrice.com about how natural gas players are going to the “dark side,” drilling for oil, a commodity that might actually make it some money.

Goldman Sachs seems to think they’re calling the bottom and that prices for natural gas can only be headed up.

In a new report out today analyst David Greely calls current prices unsustainably low.

Here’s the breakdown of his argument:

The current low NYMEX natural gas prices are already triggering a
series of reactions that should tighten the supply-demand balanceĀ 
NYMEX natural gas prices have declined meaningfully over the past few weeks, as an early
end to winter temperatures has been reflected in high inventory numbers and an earlier-
than-normal start to the summer injection season in the United States (see Exhibits 1 and
2). However, we believe that the decline has taken NYMEX natural gas prices to a level that
motivates a substantial tightening of the supply-demand balance.

NYMEX natural gas prices have fallen substantially below NYMEX Appalachian
coal prices, which have remained stable over the past month (see Exhibit 1). This
has re-established the economic incentive for coal-to-gas substitution in US power

NYMEX natural gas prices have also fallen substantially below UK NBP natural gas
prices (see Exhibit 1), reducing the economic incentive to send LNG cargoes to the
United States.

We also believe that the decline in NYMEX natural gas prices will motivate high-
cost US natural gas producers to curtail production. It has recently been reported
that the US Department of Energy (DOE) production data has not accurately
captured this response, and that it is currently overestimating US domestic
production. With the introduction of the revised EIA-914 survey, we expect a more
accurate picture of the response of high-cost US domestic production to lower
prices to emerge.


Photo: Goldman Sachs


Photo: Goldman Sachs

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