A Super Cheap Commodity

Natural gas is more than a place to hide. It is, simply put, super cheap. As most other commodities — including oil — have rallied, natural gas remains stuck in a bog. In fact, the ratio of the price of crude oil to the price of natural gas topped 18-to-1 recently, which we have not seen since 1990, according to Barron’s.

The price of natural gas fell because there was too much of it. We are in a recession, after all. Industrial demand for natural gas has fallen through the floor and into the basement. But mindless zombies or congressional leaders (I repeat myself…) do not run this industry.

Producers are cutting back. And the decline rates on those gushing shale gas plays (which helped contribute so much gas to the pool) are 60-75%. Meaning that if these producers don’t drill, the flow of gas from their wells will fall by that much in the first year. And they aren’t drilling — not as much. The rig count has collapsed. It has fallen much faster than in the 1981/82 collapse, the worst since the Great Depression and one that still makes old natural gas men cringe to this day.

Another point: The marginal cost to produce natural gas for the vast majority of the industry is probably somewhere around $6-8. This next chart gives you a good snapshot of what the U.S. gas situation looks like.

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Right now, the spot price of natural gas is under $4 and sits right on the industry’s cash costs and well below marginal costs. In short, natural gas supply is going to start to dry up here really soon. Grab your natgas ideas before the rush.