Supply and demand rule upside-down with gas It's snowing in the North, icing in the South and cold just about everywhere, but natural gas -- the fuel that most of those chilly residents are using to heat their homes -- is still cheap. What gives?
The current
January 29, 2009 at 10:23PM
Well, terrible industrial demand for gas, for one.
But a big part of the reason is on the supply side: too much production.
For the latest example, take a look at the latest drilling statistics from Texas (which don't appear to be online). Gas production in Texas rose 16 percent in November from the previous year, even as prices were tanking. Don't expect the soon-to-be-released December data to be any better for gas prices -- producers completed a whopping 45 percent more wells in December compared with the previous year.
Why didn't producers respond to lower prices by pulling back their drilling? Actually, they did. The number of drilling rigs running in Texas peaked in August and has fallen 29 percent since then. But a big part of that drop has come in just the past few weeks, as drilling contracts signed last year expired.
Some companies aren't willing to wait.
Occidental Petroleum said Thursday that it was taking a $58 million charge because of fees paid to terminate rig contracts.
Even once the rigs went idle, the cuts take time to work their way through the system. During the boom times of early 2008, companies drilled at a frantic pace, leaving them a backlog of wells that had been drilled, but not yet brought online. Hence all those completions in December.
The good news for producers is that the backlog is disappearing. And drilling permits tumbled 30 percent in Texas in December compared with the previous year. That should eventually bring the gas market back into balance.
Just don't count on it happening soon. The U.S. Department of Energy reported this week that the country has 34 billion cubic feet more gas in storage than last year.
You can bet that the gas industry is hoping that Punxsutawney Phil sees his shadow on Monday.
WALL STREET JOURNAL
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Health care spending rose by 15%, driven by higher prices. Officials say solutions are needed to prevent Minnesotans from being priced out or delaying care they need.
