2014: The Year The U.S. Shale Gas Bubble Bursts & The Boom For Precious Metals?

Place your bets wisely because 2014 may turn out to be quite the pivotal year for the markets.  As the MSM and Wall Street continue to push the hype regarding the Great U.S. Shale Energy Boom, serious cracks are beginning to appear in the natural gas market.

The forecast by the Shale Energy Industry that the U.S. will be able to grow its natural gas production for a decade at a price below $4.50 MMBtu, seems to be losing credibility as the price of natural gas has already shot above the $5 level.

Here we can see that in the first few weeks of 2014, the price of natural gas reached $5.20 MMBtu (million British thermal units – standard market trading unit).

NatGas Chart Jan 2014

Well, how can this be?  According to the EIA’s forecast published in an article during the middle of last year by EnergyWire:

Shale gas production doesn’t make a major upward move until 2016, according to EIA. Spot prices for natural gas at the major Louisiana pricing hub will drop to $3.12 per million British thermal units in 2014 and 2015, below this year’s average forecast price of $3.25, according to EIA’s Annual Energy Outlook. Prices don’t pick up until 2016 either, in the EIA assessment.

The EIA – U.S. Energy Information Agency stated in the summer of 2013 that the price of natural gas would drop to $3.12 in 2014 and 2015 (from this point on I am going to show natural gas prices without the MMBtu).

If we check out Bloomberg’s most recent energy market data, we can see that the current price of natural gas is almost $2.00 higher than the EIA’s forecast of $3.12, just a mere six months ago.

Natural Gas Price Bloomberg

While many in the industry are stunned by this $2.00 spike in the price of natural gas, if you follow the correct energy analysts… this is no surprise whatsoever.

One such energy analyst is Bill Powers of Bill-Powers.com, who recently wrote the book, “Exploding the Natural Gas Supply Myth: COLD, HUNGRY AND IN THE DARK.”

Cold Hungry And In The Dark

Many of Bill’s predictions in the book have already come true.  In a recent interview on The Energy Report, Bill stated the following:

Several of the predictions I made in the book have come true since the book hit the shelves in July. First, we’ve seen numerous shale plays head into decline. We’ve seen big declines from the Haynesville as well as the Barnett. The Fayetteville is in decline; there have been further declines in the Gulf of Mexico and Wyoming. But what has really changed is the North American natural gas market has become extremely unbalanced, which was what I had predicted would come to pass sometime in the 2013–2015 time-frame. The cold weather over the last six weeks has accelerated what I have been talking about in the book.

I predicted that gas prices would lead to layoffs and industry supply disruptions, and that’s already occurred. We’ve seen paper mills in New Hampshire lay people off because natural gas prices in New England were north of $50/million Btu ($50/MMBtu) for a period and remain very high. We’ve also seen incredibly high prices in New York, and this is a time of record production coming out of the Marcellus. These are really the first examples of the violent price spikes and industrial shutdowns we will see in other parts of the country.

Bill Powers

(Bill Powers, Bill-Powers.com)

I spoke with Bill last week and he shared some very troubling information and data on the U.S. Shale Gas Industry.  Bill believes a peak in U.S. shale gas production could occur in 2014 or 2015 at the outset.

The reason why Bill suspects shale gas production in the United States will soon peak is due to the fact that there is basically only one shale gas field that is still growing its production.  This is the Marcellus, located in Pennsylvania and West Virginia.  Without the growth of the mighty Marcellus, U.S. shale gas production would already be declining.

In the chart below, we can see that except for the Marcellus, the rest of the shale gas fields in the U.S. are in decline:

Montly Dry Gas Production from U.S. Shale Plays

As the Barnett, Fayetteville, Woodford and Haynesville shale fields peaked, gas production from the Marcellus (shown in brown) has increased substantially allowing overall production in the United States to continue to grow.

While the Eagle Ford Field (dark brown and on the top) is showing an increase in gas production, it is more a liquid oil play and without the huge growth from the Marcellus, its contribution alone would have not offset the declines in the other shale gas fields.

If the Marcellus peaks and declines in 2014, Bill thinks it may turn out to be a peak in overall U.S. gas production.  We must not forget, the average annual decline rate for U.S. natural gas production is currently in the 23-24% range (CitiResearch).  It takes a great deal of new production to offset the loss of supply due to this high annual decline rate.

Bill also told me that due to the extreme cold weather and natural gas supply disruptions in the northeast, some energy utility companies in New York have been paying $150 for natural gas.

Furthermore, the cold arctic weather conditions taking place in the Midwest and Northeast have resulted in record natural gas withdrawals from the country’s underground storage.  In just the past two months, natural gas storage went from being in the middle of the 5-year average to a new record low.

U.S. Natuaral Gas Underground Storage

As we can see from the blue line, the country’s working gas in storage is now below the 5-year minimum average.  This is bad news as there seems to be no let-up in the ice-cold temperatures plaguing eastern part of the nation.

Bill forecasts that we are going to see prices of natural gas in the $5-$7 range in the next few years, with the possibility of much higher price spikes.  These price spikes could occur due to what Bill warns as much lower than average underground gas storage levels from the continued record withdrawals on top of flat or declining domestic gas production in 2014.

Bill’s gloomy forecast for the future of the shale gas industry is stark in comparison to many in the industry.  One analyst who sees things much differently in the shale gas industry, is Ron Muhlencamp.

Ronald Muhlenkamp

(Ronald Muhlencamp, Muhlencamp.com)

Ron who was interviewed by the same website – The Energy Report (a week after Bill’s interview) had this to say about the U.S. shale gas industry:

The gist of my presentation is that natural gas has become an energy game changer in the U.S. We are cutting the cost of energy in half.

…..Our production of gas has not peaked and is not declining. We are using fewer rigs drilling for gas, but each well, particularly if you drill horizontally instead of just vertically, is producing so much more gas. Production is not declining and isn’t likely to for at least a decade. At current rates, we can drill in Pennsylvania for another 50 years.

My forecast is $4/Mcf, give or take $1. We just had a big cold snap on the East Coast. What used to happen is any time you had a cold winter, the price of gas jumped. For instance, in 2005, when crude was selling about $50/barrel ($50/bbl), gas began the year at about $7/Mcf, which was on par with crude, but in the wintertime, it doubled and ran up to $14/Mcf. The recent cold snap took gas all the way up to ~$4.20/Mcf. Gas is going to be in that range for a long time.

Ron believes that natural gas in the U.S. will remain at the $4.20 level for a “long time.”  As I mentioned in the beginning of the article, the price of natural gas is already above $5.00.

Ron is so sure of his long-term natural gas forecast, he went on to make this comment in response to a question regarding Bill Powers’ predictions:

I’d be very surprised if the price in the next decade gets over $5/Mcf for any extended period of time because there’s an awful lot of gas that’s very profitable at that price. I’m willing to make that bet with Bill Powers.

It will be interesting to see how events in the U.S. natural gas markets unfold in 2014.  I got my money on Bill Powers.  I have been following Bill for several years and I believe his understanding of the shale gas industry is spot on.

I highly recommend reading Bill Powers book, Cold, Hungry And In The Dark.  You can also follow Bill at his twitter feed below:

https://twitter.com/billpowers1970

I will be including a great deal of information on the shale oil & gas industry in my upcoming first paid report, The U.S. & Global Collapse Report.  I have only touched on the subject matter in this article.

The Coming Boom In Precious Metals

I am not going to spend much time on the precious metals in this article, however, the next image says it all.  If a picture is worth a thousand words, then the table below is worth over $400 million (at current market prices):

Comex Gold Inventories 012814

In another stunning withdrawal, JP Morgan had  an additional 321,500 oz  gold ounces removed from its vaults today.  Since last Thursday, JP Morgan has lost 44% (20 metric tons = 643,000 oz) of its gold inventories.

Here is the Comex inventory table for last Thursday:

Comex Gold Inventories 12414

According to Harvey Organ, February is going to be a big delivery month with nearly 40 metric tons standing for delivery at the Comex.  It will be interesting to see if the Comex has the ability to settle with physical gold… or if will they be forced to settle paper gold contracts with cash only.

At some point in time, we are going to see a DEFAULT on the Comex.  All the naysayers who believe the precious metal markets are not manipulated…. 2014 may be the year “Ya Gonna Have to Eat Ya Hat.”

SRSroccoReport Twitter Button

Enter your email address to receive updates each time we publish new content.

I hope that you find SRSroccoReport.com useful. Please, consider contributing to help the site remain public. All donations are processed 100% securely by PayPal. Thank you, Steve

12 Comments on "2014: The Year The U.S. Shale Gas Bubble Bursts & The Boom For Precious Metals?"

  1. just chart yen/gold and you will see a near 1/1 inverse relationship since ’09.

    Since Yen began it’s big devaluation in ’13…GLD gold holdings have been puked out from 1350 tons now down to 792 tons…with likely more today. Another 10% devaluation of the Yen and GLD holdings should be halved again? The faster they print, the more worthless gold becomes. Interesting.

    Comex has 222 tons of which 11 are available for delivery. LBMA is apparently only full of bare shelves.

    Gold scrap sales has collapsed by 80% since the peak in ’08…from 880 tons to less than 200…

    Funding in Yen to go short paper gold to go long physical gold.

    In theory this works shorting the price of gold while going very long the physical asset…

    Comex deliverable gone from 3 million oz to 375 k oz in ’13…GLD lost 500 of it’s 1350 tons…LBMA pretty well cleaned out…all the non-mining scrap sales have collapsed…mining production flat at best and at/near/below the all-in cost of production…

    So available supply @ these prices is collapsing and assuming Yen devaluation continues un-abatted, soon the shorting will no longer have a correpsonding physical asset available with which to pair off long against. Simply another 10% Yen devaluation and nearly all available physical supplies are gone or unavailable (non-deliverable). This is coming @ us very rapidly…it is quite obvious and nearly every obvious trade is wrong…so what are we looking at???

  2. Very interesting on the nat gas article…and the timing w/ the price spike yesterday was pretty impressive. The energy component to economic growth in general and mining specifically is so crucial…but sometimes seems the multi-variable equations confuse rather than enlighten but please remain focused on the macro picture regardless if some don’t want to follow you down the rabbit hole.

  3. One of your best articles yet!

    I’ve always admired your ability to explain complex energy and market conditions in simple terms.This data further support what we already know on both the micro and macro level,which is to say,the dawning of a new economic age not predicated on a single nation’s worthless paper investment instruments and a return to sound money.The MSM can continue to deceive the masses for now,but the reality of a dearth of cheap,abundant energy is hastening the demise of the current paradigm whether they want it to or not.

  4. Mike in Chicago | January 30, 2014 at 10:29 pm | Reply

    Don’t know where billy boy gets his info., but I’m in the energy industry, and have been for more than 20 years.

    As we speak, many wells that have been drilled, have been capped off. You know what that means ? It means there is plenty of supply, and so these stupid crys of decline are just way off base. People haven’t done any research on this whatsoever, and haven’t done any calulations on the amount underground, but the people in the know have done them, and mr billy boy is playing on the fears of perpetual doom and gloomers which exist by the 10’s of millions here in the US. Just look at the proliferation of prep sites, and even Costco getting into the act. This Doom stuff has become a multi billion dollar industry because Americans are naive and fearful, and easily duped into dumb decisions. No one can think for themselves any more so they assume worst case scenario for everything. Also what the graphs show is dry gas. There are also wet gas wells, and these are by far even more profitable producing other high value by products. The gas in them in the form of methane is just a bonus. Anyone here ever heard of methane hydrates ? Well when we supposedly run out of shale gas, methane hydrates which exist all over the sea floor, dwarf continental supplies by a long shot. Folks, we’ll be living on fossil fuels like this more than 500 years from now. Get a life. Or at least do some independent study and not rely on imbeciles who are ripping you off like billy boy.

    • Mike in Chicago,

      Thanks for the comment. I don’t know what line of work you do in the energy industry, but the notion that the U.S. has all these capped wells ready to be opened and extracted… just doesn’t make sense anymore. It used to be a pretty good URBAN LEGEND, however the data that is coming out suggests that we are producing the most expensive stuff we can right now.

      Shell is getting out of many shale gas plays because there is no money in it. Oil companies are spending record amounts of money just to keep oil production from declining. I received this from Andy Hoffman today as it pertains to Exxon:

      Exxon reported lower than expected profits as heavy capital spending failed to stop production declining. Oil and gas production fell 1.8% y/y in Q4. Natural gas production declined across the world whilst its oil production fell in half the regions it operates. To try and stop the decline it said it will ramp up exploration projects over the next two years to find newer reserves. It spent USD42.5bn in 2013 on exploration and capital projects of which the CEO commented last year “I never would have dreamed we’d be spending at this level”

      There is no way oil companies are going to spend $40-$70 producing oil in the Bakken if there are all these capped wells around the country…. no way indeed. Oil companies are just not that stupid.

      I also know many excellent folks in the energy industry, and they do not believe the U.S. has all these capped wells ready for the picking.

      steve

  5. Exactly which numbers, let’s say in Figure 2, do you disagree with?
    Why does a barrel of oil cost $108 right now? Shouldn’t the price be coming down over the last couple years of the boom? Why is natural gas more than doubling in the last couple of boom? Shouldn’t the price be going the other way because of the boom? How is it that we were producing like 10 million domestic barrels in 1970 but its millions less than that now?

  6. Mike, I’m in the upstream side of energy business for over 30 years, all in exploration, production and economics. You forgot 1 small detail. Check the SRSrocco logo.

    • fairguy,

      Totally agree. Art Berman who has been in the energy industry for decades shows in the presentation below, that the only reason why some shale energy companies are making profits is due to the fact that they are recording costs on a POINT FORWARD BASIS. Large oil companies have to report FULL CYCLE COSTS, which is why Shell and now Exxon are exiting shale gas.

      There is just no money in Shale Gas right now… even though some in the industry believe companies are making a lot of money at $5 MMBtu.

      I recommend anyone to watch Art Berman’s presentation on U.S. Shale Gas:

      http://www.youtube.com/watch?v=8FyoiTH2z0o

      steve

  7. @ Mike from Chicago: Chicago says it all. The first place where carbon tax exchanges were “set up”. Just like the stock market which is “set up”/rigged. Just like the banks. As Fairguy said, check the logo. If it costs more to get the energy out than what you can sell it for…..dum da da dum…no point in taking it out. The whole system is rigged. Oil is trading at what right now? $105 give or take. We are still paying $3.50/gallon. When it was at $180/barrel is when the first high peak came so in essence, we should be paying $1.50/gallon not $3.50. Perhpas those big long 20 years you’ve been in business have made you shortisighted. Either that or you’re like 90% of all the other people in any industry, just plain average/stupid. It’s not your fault, since the government took over the educational system in May of 1980, we have been steadily declining in education…for a reason. Not doom and gloom; for a reason. It’s all interconnected.

  8. http://surplusenergyeconomics.files.wordpress.com/2014/01/brief-guide.pdf

    This paper seems to back or add to your insight on energy being the real driver of everything. I hope this adds credibility to your POV, keep up the great work…enjoy

    znuthaus

    • znuthaus,

      Thanks for the link. I will repeat myself here.

      ENERGY is the DRIVER
      FINANCE steers the ECONOMY

      Unfortunately, Wall Street and the banking elite are steering us right over the cliff. I don’t see a good end to this..

      steve

  9. What’s going on here is really simple. The price of natural gas is just absurdly low, making many high tech (horizontal drilling, sequential fracking) shale plays unprofitable. It is far better to drill the same well somewhere else, and pump oil for $90+ per barrel. Consider this: 1,000,000 BTU of gasoline energy costs $23.00. 1,000,000 BTU of natural gas energy costs $4.74 (at today’s wholesale prices). That’s stupid cheap.

    As the shale boom started it attracted lots of seasoned players, and lots of inexperienced speculators. Now the speculators have been purged from the industry, either by going out of business or figuring out how to operate intelligently. So we have seen a huge drop in production as these guys left the scene.

    Now, we have a cold winter, and the stocks are dropping and the price is finally approaching something reasonable. If the price ever approached parity, shale gas would be a very profitable enterprise indeed, and the production numbers would increase (explode) again.

    I would prefer to see us convert our trucking fleet to LNG, than build ridiculously expensive LNG terminals and export it, but that’s just me.

Leave a comment

Your email address will not be published.


*