reminder of what season this actually is.
There is also something else happening this morning.
Natural gas prices are moving up.
There is still some way to go before these prices reach the $4 plus level (still the perceived breakeven point for a number of producers). Still, after testing the low $3 range earlier in the month, the temperatures in the East are certainly bringing gas back into perspective.
That was because the amount of gas extractions was much above anticipated levels. The combination of lower demand and higher supply translated into a downward price pressures.
But we are in a different environment for gas production than we were a few years ago.
Until 2005, the assumption was that the U.S. would need to import more liquefied natural gas (LNG) to compensate for accelerating declines in conventional domestic production.
LNG overcomes the primary problem faced by natural gas users. Available supply is traditionally limited to where pipelines are running. LNG, on the other hand, cools gas to a liquid, allowing it to be transported by tankers almost anywhere by water, regasified at an import terminal, and then injected into the local pipeline network.
By the middle of last decade, estimates of how much domestic gas need would have to be imported via LNG were as much as 15% and as soon as 2020.
But the ability to exploit unconventional deposits (shale and tight gas, coal bed methane) has dramatically changed the equation.
The Rise of U.S. Export Terminals
Companies are retrofitting current import terminals to export LNG from the U.S., using shale gas excess volume as the feeder stock. Of course, that also provides an additional source of revenue for producers and processors… and added potential for investors.
From a current level of zero, global estimates are putting the American component in LNG trade at 9-12% as early as 2020.
This will be starting in earnest next year (2014) and there are huge markets waiting in both Asia and Europe. Europe is a straight shot from East Coast (Cove Point, MD) and Gulf States (Sabine Pass) locations.
However, the Asian market remains the main LNG consumer. There, the 2014 completion of a project to deepen and widen the Panama Canal will allow LNG tankers to use the shortcut and open Asia to U.S. LNG sales.
But LNG is not the only or even the major demand spike underway for gas.
It’s what’s happening elsewhere that will be the real boon for investors.
Power Plant Retirements Swell
The U.S. will be retiring at least 90 GW of electricity generation by 2020, with an additional 20-30 GW likely because of new non-carbon emission limits. The vast majority of this is coal-fired and is being replaced by gas as the fuel of choice.
For each 10 GW replaced, 1.2 billion cubic feet of gas will be required daily.
If only half of the expected capacity replacement occurs, the additional requirements would eliminate three times the current gas surplus in the market.
The LNG and power needs will buttress the demand side regardless of what Mother Nature chooses to do this winter.
There are also increasing usages in other areas:
- As replacement for crude oil as raw material for petrochemical production, fertilizer and all manner of plastics and components;
- In broad industrial uses from normal energy requirements to the development of new chemical and related lines (this industrial use likely to be the lack to kick in after a recession); and,
- In the expansion of LNG and compressed natural gas (CNG) as a vehicle fuel (already underway in heavy trucks).
All of this has prompted upward revisions in what had been still weak gas pricing estimates. Most analysts are putting the target at about a dollar above current prices (currently this morning about $3.53 per 1,000 cubic feet, or million BTUs, the NYMEX futures contract unit).
My estimate puts natural gas prices at around $4.65.
However, just about everybody is looking at new utilizations for gas increasing the price to about $6 by as early as 2015 or 2016.
Now we are not going back to the $13 levels experienced some five years ago for one simple reason. Today, we have far more extractable reserves than we did back then. Operating companies can rev up production quickly.
How to Profit From Higher Natural Gas Prices
So, how should you play this?
The improvement is coming, but there will be some hiccups along the way. The sustainable rise in price is also not something that will be happening in an accelerated fashion anytime soon.
There are two approaches the average investor can use to “test the water.”
First, focus on the producers and service providers who are able to work in both oil and gas, both on the conventional and unconventional sides of both. The oil prospects are improving more quickly and this allows increasing commitment to gas without becoming dependent on what is still a sluggish improvement.
Second, begin positioning in those sectors likely to benefit most from the rises in demand noted above. LNG may not be flowing in a major way for more than a year. But the huge multi-billion dollar, 20-year plus contracts for import are already being signed.
Here, members of my Energy Advantage have already established holdings in the market leaders: Cheniere Energy, with an easy to remember stock symbol (NYSE:LNG); and its connected partnership Cheniere Energy Partners, LP (NYSE:CQP).
Cheniere Energy owns a massive export terminal at Sabine Pass on the border of Texas and Louisiana. This facility received the first blanket permission from the U.S. Department of Energy for the export of LNG to any country in the world not on a sanctions list (sorry Iran and North Korea). The company already has six huge commitments from some of the largest LNG importers globally.
CQP is the partnership actually controlling the terminal. With Washington finally signing off on the export of LNG, this is going to be moving up.
Exploiting these prospects will require some time and a more detailed strategy as the natural gas prices improve.
But at least the above two suggestions will allow you to start the process without mortgaging the farm.
Related Tickers: United States Natural Gas Fund LP (NYSEARCA:UNG), First Trust ISE-Revere Natural Gas Index (NYSEARCA:FCG), Linn Energy LLC (NASDAQ:LINE), Devon Energy Corporation (NYSE:DVN), Chesapeake Energy Corporation (NYSE:CHK).
Dr. Kent F. Moors is an internationally recognized expert in global risk management, oil/natural gas policy and finance, cross-border capital flows, emerging market economic and fiscal development, political, financial and market risk assessment. He is the executive managing partner of Risk Management Associates International LLP (RMAI), a full-service, global-management-consulting and executive training firm. Moors has been an advisor to the highest levels of the U.S., Russian, Kazakh, Bahamian, Iraqi and Kurdish governments, to the governors of several U.S. states, and to the premiers of two Canadian provinces. He’s served as a consultant to private companies, financial institutions and law firms in 25 countries and has appeared more than 1,400 times as a featured radio-and-television commentator in North America, Europe and Russia, appearing on ABC, BBC, Bloomberg TV, CBS, CNN, NBC, Russian RTV and regularly on Fox Business Network.
Moors is a contributing editor to the two current leading post-Soviet oil and natural gas publications (Russian Petroleum Investorand Caspian Investor), monthly digests in Middle Eastern and Eurasian market developments, as well as six previous analytical series targeting post-Soviet and emerging markets. He also directs WorldTrade Executive’s Russian and Caspian Basin Special Projects Division. The effort brings together specialists from North America, Europe, the former Soviet Union and Central Asia in an integrated electronic network allowing rapid response to global energy and financial developments.