The Wonderful Curse

Deck: 

Production constraints and demand pressures mean high gas prices are here to stay.

Fortnightly Magazine - December 2007
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Volatility in energy prices is both a scary and wonderful thing. It brings risks that must be managed under uncertain future conditions. It also brings opportunities to profit from price movement and competitive market advantages exploited through strategy, skill and luck. Just how good the outcome of such volatility can be depends on how well each market participant studies the fundamentals, manages uncertainty and remains flexible.

With natural-gas supply and demand nearly in balance, gas prices and volatility levels have remained tenaciously steep by most historical measures since early 2003. The horrific hurricane damage sustained in 2005 in the Gulf of Mexico added further stress to domestic natural-gas and oil supply infrastructure that is not quite yet back to normal. U.S. crude oil production in 2006 averaged about 5.1 million bbl/day, down slightly from 2005 levels as a result of the hurricanes. And offshore gas production averaged 7.8 Bcf/day in 2006, down nearly 20 percent from mid-2005 levels, although some is undoubtedly due to gas-deliverability depletion. Since that time, gas prices have retreated but still remain well above long-run supply cost.

Current high gas prices reflect several factors that have converged into the “perfect storm.”

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