The forward strip is now high enough to test the thesis that $4+ gas is attractive for drillers with superior acreage.
Gas can certainly keep rising before the end of winter, as the severity of the inventory crunch becomes better understood. But the longer dated strip is notably flat, despite the common knowledge that LNG exports are imminent, inventories are at record lows, coal plants will be decommissioned in droves, and hydro power will significantly underperform this year due to droughts in the west. Industrial demand and net imports are also expected to show a bullish move in ’14.
Some producers have rallied, but we have yet to see much opportunity to hedge in 2015 and beyond, and if the storage and distribution system survives the winter intact, drill sites and rigs will not be the weak link as the industry gears up to meet the many sources of incremental demand.
Producers no longer face much prospect of a near term price collapse, but we can expect to see inventories recover quickly when winter ends. The strip is telling this story, and investors are still wise to wait. These prices will damage demand and attract rigs quickly, and a single season of high prices will not translate into equity appreciation that rewards investors adequately.