US shale gas changes the face of the market

What's Up: The United States has found relief from the costs associated with its voracious appetite for energy.

Workers drill for natural gas near Towanda, Pennsylvania. Goldman Sachs predicts that gas price will rise to $4mmBtu next year. Tim Shaffer / Reuters

The United States has found relief from the costs associated with its voracious appetite for energy after new production techniques greatly increased the amount of accessible reserves of oil and gas.

Access to gas trapped in shale formations, in particular, transformed a gas market that became flooded with new supply.

After a precipitous drop that resulted in US natural gas prices falling from as much as US$8 per million British thermal units (mmBtu) in 2006 to slightly over $2.3 per mmBtu, there is now upside to gas.

"The market appears to be increasingly convinced that there are tightening signs in the supply-demand balance," said analysts at Barclays Capital (BarCap) in a note.

Goldman Sachs predicts that the gas price will rise to $4 per mmBtu next year, as supply is dropping off.

According to BarCap, electricity producers are increasingly switching to gas from coal, causing inventories to fall. The gas overhang has fallen by 32 billion cubic feet last year to 840 billion cubic ft.

Low prices are also increasingly acting as a disincentive to production and the amount of production facilities focusing solely on the extraction of natural gas.

"Mounting evidence that production is responding to low prices … new lows in the gas-directed rig count and recent EIA [US energy information administration] data confirming production declines in February, sparked a sharp rebound in natural gas prices," said Goldman Sachs in a research note.

"Although associated gas production growth will likely be impressive, aggregate US supply should turn lower starting in[the third quarter]," added BarCap. But prices may be kept low throughout this year to encourage the conversion of power generation from coal to gas and because storage constraints limit price jumps, said Goldman Sachs.

The US also imports natural gas from Canada, which has depressed prices further.

In the long term, Canada is likely to export some of its shale gas as liquefied natural gas, restricting the gas supply in the US.