First, the bad news: Natural gas prices are down, and no lifting events are on the horizon. Across the U.S., the hot summer is waning, cooler temps are creeping in, and industrial demand shows no sign of gaining momentum, at least in the near term.

Meanwhile, gas storage levels have increased. Injection for mid-September was 85 billion cubic feet (Bcf), compared to 67 Bcf for the same week in 2009, and 77 Bcf for the five-year average. The gas-rig count is holding steady, despite low commodity prices.

Next, the good news: “Stock prices continue to trade at levels that imply $5.50 to $6 long-term gas, well north of the $3.79 spot price and above the $4.71 strip average for 2011,” reports Jefferies & Co. Inc. in its recent Energy Weekly Chartbook newsletter. “Ongoing weakness in spot prices is making gas increasingly competitive with coal.”

In fact, gas was trading 43 cents per million Btu (MMBtu) below the price of low-cost coal and $1.03 per MMBtu below average-priced coal.
On the liquids front, the gas-frac spread (natural gas compared to natural gas liquids (NGLs) increased by 35 cents per MMBtu at press time. Houston Ship Channel natural gas was up 9 cents per MMBtu, while NGLs increased by 44 cents, according to the report.

In August, ethane margins increased 66% compared to July. Specifically, since June 30, ethane prices have increased by about 11% to average 52 cents per gallon, and could improve by an additional 12% through the end of the year. Jefferies predicts the increase due to a possible correction in ethane inventory, tight fractionation capacity and the wide crude oil-to-natural gas ratio. Propane margins increased 38% to remain at a healthy level of $8.02 per MMBtu.

“Based on prior cycles, higher propane margins could result in a 0.5-Bcf-per-day reduction in natural gas volumes,” reports Jefferies.