The plunge in oil prices has a lot of the investment community heavily divided between those who see opportunity in US unconventional oil producers and those that see fracking as an unprofitable way to produce oil.
Interestingly though, very few people are levying similar criticisms against natural gas producers. David Einhorn, whose tirade against Pioneer Natural Resources made headlines recently, excoriated the business of fracking. But Einhorn explicitly exempted natural gas producers from his attack, instead referring to natural gas producers as low cost leaders.
That is because shale gas producers have been here before. Natural gas prices plummeted years ago and the industry has become used to surviving in a low-price environment.
There is an enormous amount of demand around the world for natural gas and the US is producing far more cheaply than anyone else. US natural gas has historically traded at between one and one-half the energy weighted price of US oil. Today that figure is closer to one-fifth, even with the fall in the price of oil. Europe and Asia are paying dramatically more for natural gas than America, and there is no sign of that trend reversing. That price difference has led many multi-national chemical companies to look at locating plants in the US to capitalize on the low price of natural gas.
The dynamics of the oil industry versus the natural gas industry are completely different. While the US is in the middle of the pack when it comes to oil production costs (though it is moving lower on this point), it is emphatically the low cost natural gas producer. Having seen natural gas prices crash several years before oil, drillers have already cleaned up their operations and cut costs.Read more by clicking right here.
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