Swamp Gas

Swamp
-noun
5. to overwhelm, esp. to overwhelm with an excess of something: He swamped us with work. [Dictionary.com]

Swamp Gas
-noun
An organic decomposition product gas which is mostly methane, the primary component of Natural Gas.

The Natural Gas Story
As crude oil prices continue to rise to pre-recession levels, prices for natural gas, the other base hydrocarbon commodity, continue to flounder. Last week NYMEX Natural Gas futures for September fell to a seven-year low below US $3/mmBTU.

The spikes are indicative of the vast reserves of natural gas, which unlike peak oil, can come on stream relatively quickly and cheaply. Liquefied natural gas technologies have also created a 'pipeline' for inexpensive natural gas reserves that were previously stranded. Worse yet is the high price of oil, which has in recent years, been in lockstep with the Canadian dollar, meaning Canadian gas producers will get even less for molecules produced north and sold south of the border. Storage levels are near all-time highs and hundreds of cubic feet per day have been shut in awaiting higher prices. The U.S. economy remains slow to return to growth compared to emerging economies despite all the stimulus. Some analysts believe a number of small and mid-cap producers will simply need to go out of business before prices for the commodity fall back in to balance. North American workers in the Oil & Gas industry have been relying increasingly on drilling natural gas wells as oil production on the continent continues to decline from it's peak (with the exception of the oilsands and other unconvnetional reserve plays). A cool summer will likely mean a tame hurricane season and forecasts of a mild autumn will keep heating demand low. All of this has been fueling rumours that the North American Exploration and Production companies will need to begin layoffs in the fall while M&A activity will increase.


Not quite apocalypse...yet
Despite all the bearish news, it's not quite time to predict an apocalypse yet for North American producers. This could still happen, if the U.S. economy were to fall into a second recession in the next 18-24 months from a economic stimulus hangover, prices could fall towards $1/mmBTU or less. For now though, contract futures beyond December 2009 continue to be sold above $5/mmBTU, a level at which most producers can be marginally profitable. Most of the hedging contracts made in 2008 when prices peaked are now expiring, leaving buyers free to spend more on new contracts and push prices higher. A U.S. government bailout could also come in the form of tax incentives for natural gas powered vehicles, furnaces or power generation, which would also push prices upwards. We're probably near the bottom, but I wouldn't hold out on $15/mmBTU gas prices anytime soon.

Coming next is the Crude Oil story.