The story of US natural gas is a good example of how quickly the supply begins to adjust to changes in demand when free markets are allowed to work. Here are the facts.
1. Supply of natural gas is now substantially above the 5-year range. At this time of the year the cycle of withdrawal from storage ends and the injection cycle begins (the inflection started earlier this year).
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| Source: EIA |
2. Prices adjust violently to the news of oversupply in storage.
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| Natural gas futures price (Bloomberg) |
3. The market action quickly translates into an adjustment to the "real economy" as the number of natural gas rigs declines (within months).
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| Source: Barclays Capital |
At the same time demand for natural gas is increasing, with gas replacing coal for some of the US power generation. Natural gas will even replace gasoline for certain applications over time. Ultimately this should lead to the leveling off of supply and the stabilization of natural gas prices. The market is already pricing that in via a very steep futures curve. Gas prices are expected to almost double two years out.
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| Nat gas futures curve (Bloomberg) |
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