Hedging Against Rising Natural Gas Prices using Natural Gas Futures

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The Fuel of the Future: Understanding Natural Gas

An Explanation of Supply and Demand

Natural gas as the fuel of the future makes sense no matter how you analyze it. Natural gas is one of the cleanest burning fuels and the United States has enough of a supply to become energy independent. It has also become one of the cheapest fuels – even cheaper than coal. So why is it not the most widely used fuel in the country when the facts clearly show that it should be our number one energy source?

Price of Natural Gas

At the time of publication, crude oil is trading at $65 a barrel and natural gas is trading at about $2.65. Natural gas prices have been declining for several years and are currently 50 percent off their 2008 peak. Typically, when a commodity drops this much in price, demand will increase and prices begin rising again. This has not yet been the case for natural gas as supplies are more abundant than ever.

Supply of Natural Gas

Even though the price of natural gas is at multi-year lows, the supply of natural gas continues to increase. There are some short term and long term reasons for the oversupply situation. The number of rigs pumping natural gas out of the ground has actually been declining, but natural gas producers have become extremely efficient at extracting natural gas. They have actually gotten so good at it that we now have a supply glut that probably won’t go away anytime soon.

The winter of 2020 was also mild which compounded the supply problem. The winter months usually burn off most of the extra supplies of natural gas every year, but if it doesn’t happen the market is left with an excess. The cost of production for most natural gas producers is around $3, so they are operating at a loss below this level. As might be expected, some of the major producers like Chesapeake Energy have announced they are cutting production significantly, and this might mean a bottom in the market is near.

Increased Usage of Natural Gas

Everything about natural gas makes sense, but there really hasn’t been a government mandate to increase the usage and infrastructure of natural gas. There have been some issues with environmentalists claiming that natural gas extraction is bad for the environment. It really isn’t, but chemicals that are used in the fracking process sometimes results in toxic spills and fracking has now been shown to cause minor earthquakes. There are natural alternatives to the chemicals that could be used, and stronger regulation in the industry would minimize this issue.

Proponents of natural gas, like the oil icon T. Boone Pickens, have been pushing hard for politicians to get behind it. Eventually, they will, but when is the question. If the government set a mandate in natural gas it would certainly help accelerate growth, but the private sector is moving along regardless. Clean Energy Fuels (CLNE) is creating an infrastructure of natural gas stations throughout the country. Think of a typical gas station, but instead, you fuel your tank with natural gas. In 2020, CLNE had 30 fuel stations open, 60 more ready to go with a goal of 150 total.

Westport Innovations (WPRT) produces engines that run on natural gas and demand is growing strongly. While cars might be best suited to run on natural gas, large trucks for hauling the nations’ freight is where the industry is concentrating.

It costs about $30,000 to convert a fleet truck to using natural gas. At natural gas prices around $2.50, each truck would recoup the conversion cost in a year and save about $20,000 a year thereafter. The engine costs are expected to drop in half in the coming years, which will give more incentive for the conversions.

Investment in Natural Gas

With the supply glut of natural gas, a long-term investment outlook is in order. Buying natural gas futures is one option, but it’s necessary to keep excess funds in reserve in case the price sinks further. There is a commodity etf – UNG, but the costs to roll the futures contracts are very high. The companies mentioned above, Clean Energy and Westport Innovations, should benefit in the coming years. There are also many publicly traded companies that produce natural gas that would benefit from rising natural gas prices.

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Hedging Against Rising Natural Gas Prices using Natural Gas Futures

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Natural Gas

Encyclopedic entry. Natural gas is a fossil fuel formed from the remains of plants and animals. Other fossil fuels include oil and coal.

Earth Science, Geology, Engineering, Geography, Human Geography, Physical Geography

Natural gas is a fossil fuel. Like other fossil fuels such as coal and oil, natural gas forms from the plants, animals, and microorganisms that lived millions of years ago.

There are several different theories to explain how fossil fuels are formed. The most prevalent theory is that they form underground, under intense conditions. As plants, animals, and microorganisms decompose, they are gradually covered by layers of soil, sediment, and sometimes rock. Over millions of years, the organic matter is compressed. As the organic matter moves deeper into Earth’s crust, it encounters higher and higher temperatures.

The combination of compression and high temperature causes the carbon bonds in the organic matter to break down. This molecular breakdown produces thermogenic methane—natural gas. Methane, probably the most abundant organic compound on Earth, is made of carbon and hydrogen (CH4).

Natural gas deposits are often found near oil deposits. Deposits of natural gas close to the Earth’s surface are usually dwarfed by nearby oil deposits. Deeper deposits—formed at higher temperatures and under more pressure—have more natural gas than oil. The deepest deposits can be made up of pure natural gas.

Natural gas does not have to be formed deep underground, however. It can also be formed by tiny microorganisms called methanogens. Methanogens live in the intestines of animals (including humans) and in low-oxygen areas near the surface of the Earth. Landfills, for example, are full of decomposing matter that methanogens break down into a type of methane called biogenic methane. The process of methanogens creating natural gas (methane) is called methanogenesis.

Although most biogenic methane escapes into the atmosphere, there are new technologies being created to contain and harvest this potential energy source.

Thermogenic methane—the natural gas formed deep beneath the Earth’s surface—can also escape into the atmosphere. Some of the gas is able to rise through permeable matter, such as porous rock, and eventually dissipate into the atmosphere.

However, most thermogenic methane that rises toward the surface encounters geological formations that are too impermeable for it to escape. These rock formations are called sedimentary basins.

Sedimentary basins trap huge reservoirs of natural gas. In order to gain access to these natural gas reservoirs, a hole (sometimes called a well) must be drilled through the rock to allow the gas to escape and be harvested.

Sedimentary basins rich in natural gas are found all over the world. The deserts of Saudi Arabia, the humid tropics of Venezuela, and the freezing Arctic of the U.S. state of Alaska are all sources of natural gas. In the United States outside Alaska, basins are primarily around the states bordering the Gulf of Mexico, including Texas and Louisiana. Recently, the northern states of North Dakota, South Dakota, and Montana have developed significant drilling facilities in sedimentary basins.

Types of Natural Gas

Natural gas that is economical to extract and easily accessible is considered “conventional.” Conventional gas is trapped in permeable material beneath impermeable rock.

Natural gas found in other geological settings is not always so easy or practical to extract. This gas is called “unconventional.” New technologies and processes are always being developed to make this unconventional gas more accessible and economically viable. Over time, gas that was considered “unconventional” can become conventional.

Biogas is a type of gas that is produced when organic matter decomposes without oxygen being present. This process is called anaerobic decomposition, and it takes place in landfills or where organic material such as animal waste, sewage, or industrial byproducts are decomposing.

Biogas is biological matter that comes from plants or animals, which can be living or not-living. This material, such as forest residues, can be combusted to create a renewable energy source.

Biogas contains less methane than natural gas, but can be refined and used as an energy source.

Deep Natural Gas
Deep natural gas is an unconventional gas. While most conventional gas can be found just a few thousand meters deep, deep natural gas is located in deposits at least 4,500 meters (15,000 feet) below the surface of the Earth. Drilling for deep natural gas is not always economically practical, although techniques to extract it have been developed and improved.

Shale gas is another type of unconventional deposit. Shale is a fine-grained, sedimentary rock that does not disintegrate in water. Some scientists say shale is so impermeable that marble is considered “spongy” in comparison. Thick sheets of this impermeable rock can “sandwich” a layer of natural gas between them.

Shale gas is considered an unconventional source because of the difficult processes necessary to access it: hydraulic fracturing (also known as fracking) and horizontal drilling. Fracking is a procedure that splits open rock with a high-pressure stream of water, and then “props” it open with tiny grains of sand, glass, or silica. This allows gas to flow more freely out of the well. Horizontal drilling is a process of drilling straight down into the ground, then drilling sideways, or parallel, to the Earth’s surface.

Tight Gas
Tight gas is an unconventional natural gas trapped underground in an impermeable rock formation that makes it extremely difficult to extract. Extracting gas from “tight” rock formations usually requires expensive and difficult methods, such as fracking and acidizing.

Acidizing is similar to fracking. An acid (usually hydrochloric acid) is injected into the natural gas well. The acid dissolves the tight rock that is blocking the flow of gas.

Coalbed Methane
Coalbed methane is another type of unconventional natural gas. As its name implies, coalbed methane is commonly found along seams of coal that run underground. Historically, when coal was mined, the natural gas was intentionally vented out of the mine and into the atmosphere as a waste product. Today, coalbed methane is collected and is a popular energy source.

Gas in Geopressurized Zones
Another source of unconventional natural gas is geopressurized zones. Geopressurized zones form 3,000-7,600 meters (10,000-25,000 feet) below the Earth’s surface.

These zones form when layers of clay rapidly accumulate and compact on top of material that is more porous, such as sand or silt. Because the natural gas is forced out of the compressed clay, it is deposited under very high pressure into the sand, silt, or other absorbent material below.

Geopressurized zones are very difficult to mine, but they may contain a very high amount of natural gas. In the United States, most geopressurized zones have been found in the Gulf Coast region.

Methane Hydrates
Methane hydrates are another type of unconventional natural gas. Methane hydrates were discovered only recently in ocean sediments and permafrost areas of the Arctic. Methane hydrates form at low temperatures (around 0°C, or 32°F) and under high pressure. When environmental conditions change, methane hydrates are released into the atmosphere.

The United States Geological Survey (USGS) estimates that methane hydrates could contain twice the amount of carbon than all of the coal, oil, and conventional natural gas in the world, combined.

In ocean sediments, methane hydrates form on the continental slope as bacteria and other microorganisms sink to the ocean floor and decompose in the silt. Methane, trapped within the sediments, has the ability to “cement” the loose sediments into place and keep the continental shelf stable. However, if the water becomes warmer, the methane hydrates break down. This causes causes underwater landslides, and releases natural gas.

In permafrost ecosystems, methane hydrates form as bodies of water freeze and water molecules create individual “cages” around each methane molecule. The gas, trapped in a frozen lattice of water, is contained at a much higher density than it would be in its gaseous state. As the ice cages thaw, the methane escapes.

Global warming, the current period of climate change, influences the release of methane hydrates from both permafrost and ocean sediment layers.

There is a vast amount of potential energy stored in methane hydrates. However, because they are such fragile geological formations—capable of breaking down and disrupting the environmental conditions around them—methods for extracting them are developed with extreme caution.

Drilling and Transportation

Natural gas is measured in normal cubic meters or standard cubic feet. In 2009, the United States Energy Information Administration (EIA) estimated that the world’s proven natural gas reserves are around 6,289 trillion cubic feet (tcf).

Most of the reserves are in the Middle East, with 2,686 tcf in 2020, or 40 percent of total world reserves. Russia has the second-highest amount of proven reserves, with 1,680 tcf in 2020. The United States contains just over 4 percent of the world’s natural gas reserves.

Photograph by Robert Sisson

Piping Up
The United states has 490,850 kilometers (305,000 miles) of interstate and intrastate pipelines to deliver natural gas all over the country.

Oracular Seeps
Natural gas seeps, where the gas flows naturally to the surface, were revered as supernatural or spiritual sites by many ancient civilizations. One of the most famous of these seeps sits atop Mount Parnassus, near the town of Delphi, Greece. Around 1000 BCE, religious and spiritual leaders established a temple with a priestess who could tell the future. Millions of people, from ordinary citizens to political and military leaders, consulted the “Oracle of Delphi” for hundreds of years.

Natural Gas Consumers
In 2020, the latest date for which the U.S. Energy Information Administration supplies information, these nations consumed the most natural gas.
1. United States
2. Russia
3. Iran
4. China
5. Japan

Proven Reserves
According to the U.S. Energy Information Administration, in 2020, these nations had the biggest proven reserves of natural gas in the world. Data from some nations, including the United States, was not calculated.
1. Russia
2. Iran
3. Qatar
4. Saudi Arabia
5. Turkmenistan

What’s That Smell?
Raw natural gas is odorless. Companies that supply natural gas add an artificial smell to it, so people will know if there is a potentially dangerous leak. Most people recognize this as the “rotten egg” smell that comes from a gas stove or oven.

Natural Gas (NG) Forecast, Page 1

Natural Gas Price Fundamental Weekly Forecast – Supported by Possible Oil Deal, but Demand Remains Key Worry

It is possible that cheap prices, cooler weather and a possible bottom in crude oil are providing support for natural gas, but until the new case coronavirus curve begins to flatten, demand destruction will continue to keep a lid on prices.

Natural Gas Price Prediction – Prices Rise as Rig Count Declines

Prices rebound as rig count declines

Natural Gas Weekly Price Forecast – Natural Gas Markets Somehow Look Even Worse

Natural gas markets were a bit choppy during the week, but as you can see, we have formed a candlestick that looks a lot like an inverted hammer. The next question is will we break the bottom or the top of this candle?

Natural Gas Price Forecast – Natural Gas Markets Test Previous Support

Natural gas markets bounce a bit during the trading session on Friday, reaching towards the $1.60 level, which is an area that markets had used as support recently.

End Of Week Technical Take on Indexes, Metals, Currencies, Oil: April 3, 2020

See what to expect today and next week as we have some huge moves about to start up again.

Natural Gas Price Fundamental Daily Forecast – Oil Price War Truce Could Trigger Short-Covering Rally

Yesterday’s EIA report indicates a lot of demand destruction. The price action suggests perhaps short-sellers had overdone it on the downside.

Natural Gas Price Prediction – Prices Drop Following EIA Inventory Report

Inventories declined by 19 Bcf

Natural Gas Price Forecast – Natural Gas Markets Break Major Support

Natural gas markets initially tried to rally during the trading session on Thursday but then broke down below the $1.60 level, an area that had been so supportive recently.

Natural Gas Price Fundamental Daily Forecast – Bearish EIA Miss Could Trigger Another Steep Plunge

Estimates ahead of the EIA report have ranged widely from a withdrawal as small as 16 Bcf to as large as 31 Bcf.

Natural Gas Price Prediction – Prices Fall Ahead of Inventory Report

Expectations are for a 4 Bcf fall

Natural Gas Price Forecast – Natural Gas Markets Fall to Test the Low

Natural gas markets initially tried to rally a bit during the trading session on Wednesday but have rolled over to reach towards the $1.60 level yet again. Looking at this chart, it’s obvious that natural gas simply can’t get off the floor.

Natural Gas Price Fundamental Daily Forecast – Mild Weather, Virus-Related Demand Destruction Capping Gains

NGI said on Tuesday as the coronavirus pandemic hangs over the global economy, natural gas traders had to factor in potentially major impacts to both supply and demand.

Natural Gas Price Prediction – Prices Drop as LNG Exports Decline

warm weather weighs on prices

Natural Gas Price Forecast – Natural Gas Markets Show Exhaustion

Natural gas markets initially tried to rally during the trading session on Tuesday but then rolled over to show signs of weakness again. The natural gas markets continue to suffer with the global slowdown in the oversupply.

Natural Gas Price Fundamental Daily Forecast – Contagion Demand Losses to Cap Gains

The direction of the May natural gas futures contract on Tuesday is likely to be determined by trader reaction to the minor pivot at $1.685.

Natural Gas Price Prediction – Prices Consolidate on Warm Weather Forecast

Prices are attempting to find a bottom

Natural Gas Price Forecast – Natural Gas Markets Continue to Test Support

Natural gas markets fell again to kick off the trading session on Monday, testing the lows at the $1.60 level before bouncing slightly. It appears that the market is working on finding some type of range.

Natural Gas Price Fundamental Weekly Forecast – Demand Pressured as Lockdowns Could Extend to April 30

We’re probably going to see much of the same price activity that we saw last week. Mild weather conditions are likely to keep a lid on prices, and barring a surprise short-squeeze, it’s going to be hard to find any bullish news.

Natural Gas Price Prediction – Prices Fall and Downtrend Remain in Tact

Natural gas prices moved lower Friday, despite a larger than expected draw in natural gas inventories reported by the Department of Energy. Inventories declined by 29 Bcd compared to expectations are for inventories to decline by 3 Bcf. This follows at 9 Bcf draw in inventories in the prior week.

Natural Gas Weekly Price Forecast – Natural Gas Continues to Show Signs of Weakness

Natural gas markets initially tried to rally during the week but did give back quite a bit of the gains to form an inverted hammer, which of course is a very negative sign.

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