Natural Gas Prices Drop

Natural Gas price dropped the week of July 18, 2008, as reported by Sam Fletcher at the Oil and Gas Journal. Sam wrote:

"The natural gas contract dropped below $12/MMbtu after the Energy Information Administration reported a surprisingly large injection of 104 bcf of gas into US underground storage in the week ended July 11. That pushed total working gas in storage to 2.3 tcf, just 361 bcf lower than in the same period a year ago and only 49 bcf below the 5-year average. Analysts said the fall in gas prices scared some investors out of the energy markets. August gas futures have dropped $3.15, or 23%, from a July 2 high of $13.69/MMbtu."

Some definitions of the above, as it contains some jargon peculiar to the energy industry.
MMbtu -- millions of British Thermal Units, the basic quantity in which natural gas is sold.
bcf -- billion cubic feet of natural gas, another basic unit of volume
tcf -- trillion cubic feet of natural gas.

This price drop is consistent with what I predicted as energyguy on several postings on Townhall.com recently. What are the reasons? Could be lots of things. It could be that more rain in the U.S. is keeping temperatures a bit cooler, decreasing the need for air conditioning. Could be natural gas producers are over-producing, trying to take advantage of the high prices. Could be more companies are in the gas storage business, in which excess natural gas is injected into storage reservoirs, then released for sale in winter. This is a relatively recent business, and makes money if the summer purchase price for gas is lower than the winter sales price.

It could also be due to a slowdown in U.S. economic activity, with industries reducing their gas purchases.

It could also be due to lower natural gas demand for electrical power production. Natural gas power plants are increasing, but the technology used to generate power is changing. The traditional, low-efficiency plants use a Rankine cycle. These achieve approximately 25 to 30 percent efficiency, meaning they waste between 70 and 75 percent of the fuel burned.

In contrast, the new natural-gas-fired power plants use the high-efficiency process known as combined cycle cogeneration. These plants achieve efficiencies at least double that of the Rankine cycle. Thus, for the same amount of electrical power produced, approximately half the natural gas is burned.

That is a big incentive, and is the reason that approximately 90 percent of all new natural-gas power plants installed in the U.S. are of the combined cycle cogen design.