They said it could never happen, although NHO did back in March: US gas storage, the equal of the rest of the world's storage combined is almost full. And it's not full because of low demand. This isn't a temporary aberration which will soon disappear sending prices zooming up again, now that the stock markets are playing Happy Days are Here Again. That argument is also one perennial peak oil bulls and UK energy catastrophists bandy about in their desperate attempts to hold up prices through scaring people.
What's happening in the US is peak demand and peak supply. Peak demand is the realisation that end-users do have a small number of alternatives to high prices that in aggregate deliver meaningful, permanent and growing demand destruction. "Conventional" energy experts have always dismissed the impact of conservation, efficiency, new technology and renewables. But little things mean a lot when there are a lot of little things: that's the impact of scaling up.
Peak supply is the sudden flooding over the past year of the market by shale gas producers. But what is getting interesting is that shale isn't working out as the nay sayers were saying even six months ago. At that time, the theory was that "unconventional" gas was expensive. If prices got too low, shale gas production would shut in as people would lose too much money, which would increase gas prices all over again. There would also be, according to a theory that sounded born out of desperation, not reality, that when US gas prices recovered, the US would suck in LNG (and it would have to really suck given the simultaneous surge in LNG production throughout the world) which would then push up UK prices which are increasingly linked to US prices.
Well it hasn't turned out that way.
U.S. natural gas producers are pumping huge volumes of the fuel into a market about to have its fill – an event that could push gas prices even lower and create pain across the industry
The situation underscores how the natural gas industry is changing, thanks to vast new gas supplies trapped in dense rock formations known as shales. New technology has allowed producers to increase output from these rocks even as the industry, as a whole, spends less on drilling. But a further slump in price may squeeze cash-strapped producers that are already struggling amid an economic downturn that has undermined energy demand.
As we were saying, conventional wisdom was producers go on a production strike. But apart from the obvious that any price at all beats no price at all, as "unconventional" gas goes mainstream, producers are learning how to produce shale at lower costs for lower prices:
But companies are counting on the diminishing cost of shale gas extraction in order to make it through the slump. Anadarko Petroleum, which saw its production jump 12% in the second quarter, said it would ramp up activity in the Marcellus Shale – a vast natural gas field stretching from West Virginia to New York – where the company can achieve a 10% rate of return at gas prices of $2.50 a million British thermal units.
Which considering the year low for gas is about $3.2 should make UK traders mighty nervous, and they should be looking over at their US colleagues:
Aubrey McClendon, chief executive of Chesapeake Energy said that there will be much "wailing and gnashing of teeth in the next 60 days" across the industry as storage fills.
But at the same time producers are turning in big results from natural gas fields that have cropped up around the country. And some producers aren't willing to hold back gas in order to defend prices.
"Pretty soon, everybody is going to start involuntarily curtailing gas so we don't see any reason to take it on the chin for the team any more than we did," McClendon said during a conference call. The company stopped curbing output in the second quarter, and saw a production increase of 5% from a year ago.
When US gas fills up, during September it will impact the UK as the US sets the price for LNG, which sets the price for the UK and Europe.
Crashing demand meets low LNG prices, high LNG production, high storage levels, Norwegian and North Sea production returning from maintenance and plenty of Russian gas sold outside of the usual oil index links. This will get interesting. We never thought we'd see single figure pence per therm gas again. We don't do predictions. But we keep open minds about all possibilities. If there is a recovery, which is questionable, peak demand has passed and all we may see for some years is flat gas prices: low prices and low volatility.