Expect gas prices to double by summer

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While most commodities have risen rapidly of late, "natural gas has been an absolute dog", says Joshua Brown on Thereformedbroker.com. The price has slid by a fifth to around $4 per million British thermal units (MBTU) in a year. That's because advances in drilling techniques mean that gas can now be recovered relatively easily from shale formations (layered sedimentary rock). So supplies in the US are now virtually unlimited or so the story goes.

Yet the conventional wisdom is wrong, according to veteran energy analyst Henry Groppe of Groppe, Long & Littell.

Groppe "has a habit of disagreeing with the consensus view and being right", says David Parkinson in Canada's Globe & Mail. In 1980, as oil was heading to $40 a barrel and forecasters were pencilling in $100, he predicted that the price would slide below $15 by the mid-1980s. It did. He also forecast oil's recovery in the late 1990s and its fall in late 2008.

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"Very optimistic estimates" of economically recoverable volumes of gas from shale have made everyone think we're "going to be flooded with gas", says Groppe. In fact, shale is only a tiny part of the overall gas supply 13% and once tapped it depletes far more quickly than conventional wells. The latter deplete by a quarter each year, while shale wells' output declines by 45% a year after an initial burst. Meanwhile, the rig count on conventional wells is 70% below pre-crisis levels. Since these account for most of the supply, the production decline rate from conventional sources will "more than offset whatever increase you get in shale". This should soon become clear, meaning prices are set to exceed $8 MBTU by the late summer, reckons Groppe.