Natural gas prices hit two-year high

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Cutbacks in U.S. natural gas drilling and production and higher North American demand combined to decrease storage levels and raise prices above $4/mmbtu in the first quarter of 2013, according to Ernst & Young Oil & Gas Center's quarterly analysis.

Gas-directed drilling fell in 2012 through early 2013, and after natural gas prices hit all-time lows in early 2012, some producers cut back production while others focused on higher-priced liquids. Despite these shifts, natural gas supply continued to soar on associated gas production and lagged infrastructure completions. Meanwhile, demand improved as power generation and industrial usage increased 21 percent and 3 percent, respectively.

"Although $4/mmbtu reflects a more-than 50 percent increase over 2012's record lows, U.S. natural gas prices are still very low compared to global markets," said Marcela Donadio, Americas Oil and Gas Leader for Ernst & Young's Global Oil and Gas Center. "The shale boom has created a new reality of abundant U.S. natural gas. Taking full advantage of this increased supply will require access to the global market in the form of LNG exports."

Despite the higher U.S. natural gas prices, regional price differences are substantial — highlighting the opportunity to ship U.S. natural gas to advantageous markets.

Access to new gas supplies from planned LNG projects in the Eastern Mediterranean, Eastern Africa, U.S. and Canada will create greater pricing balance and impact the economics of many proposed LNG projects. Australia's booming LNG sector, which is experiencing rapid cost escalation, will be the most pressured by these new supplies.

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