Natural gas prices are trading up around 30% this month, with April futures nipping at the $4-per-million-BTU mark not seen since the end of 2011. The late winter weather helped lower the weekly storage level by 18.5% year over year, but should we expect prices to move back toward $3 per million BTU once seasonal spring weather sets in?
Not likely. With record low gas prices in 2012, natural gas producers started withdrawing capital away from drilling natural gas wells and shutting down or overhauling rigs to tackle oil liquids plays. Total natural gas land rigs have been diminishing sharply since October, with March's total gas rig count down 34.9% year over year, according to Baker Hughes.
With both small and large gas players moving capital away from dry gas wells for the past year and a half, gas prices should increase for two reasons. The first is entry time to recommit to drilling gas wells. It takes an incredible amount time to deal with labor, rig, and lease holding contracts. According to Ultra Petroleum (NASDAQOTH:UPLMQ) Chairman and CEO Mike Watford, once capital is removed, gas prices become sticky, since companies are hesitant to recommit money and secure new contracts and get new drilling permits until natural gas prices are high enough to support re-entry for the long term.
Second, outside the view of low-cost natural gas producers, most E&P companies are focusing production on oil plays, and with crude prices ensuring healthy profits, no incentive remains for new entrants into the U.S. natural gas market. Natural gas insiders and analysts believe prices will stabilize between $4 and $5 dollars in North America for the long term, which will supply healthy margins for low-cost natural gas producers.
In the following video, Motley Fool energy analyst Joel South speaks with Taylor Muckerman about a few of his favorite low-cost natural gas players in this space.
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