Tuesday, April 21, 2009

Is Natural Gas As Low As It Can Go?

May Natural Gas futures currently sit a shade above $3.50 - their lowest point since 2002!  Check out this chart...can you spot the trend?

Source: BarChart.com

Jeff Clark writes that $3.50 is widely regarded as the "shut in" price for natural gas - the price where drillers are better off closing the well than continuing to operate it.

When the price of a commodity drops below the cost of production, that is music to our ears.  After all, the best cure for low prices is low prices.  Keep an eye on the natty, because something has to give, sooner or later.

Looking for an easy way to invest in natural gas?  Check out UNG, a fund that tracks the price of the natty - it's a simple way to speculate on natural gas prices from the comfort of your stock trading account.


Adam Young said...

I disagree--1. shut-ins would only raise the price to a level that would settle a little above marginal cost of production, and 2. it doesn't matter because of 3 letters: L-N-G. See full analysis here that looks deeper than just rig lay-downs: http://www.thebarricadeblog.com/?p=837

Brett Owens said...

I enjoyed your piece, thanks for pointing it out. Can you expand upon why shut-ins would raise the price to just above the marginal cost of production? I could see that being the case if setup was easy, but I don't think it's that simple just to drill a little more when prices start to move up. Supply tends to lag price quite a bit in this market.

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