Five Reasons Why Natural Gas Prices Will Continue to Rise

Heating needs were the driver in the first case, electricity generation for air conditioning determining the second.

These still exist, but today there are other determining factors.

The environment in which they operate has changed dramatically. Given the known extractable reserves currently available in the U.S. market, it would be possible to increase overall gas production 25% a year for the foreseeable future.

Nobody is about to do that, of course.

It would destroy the market and most of the companies working in it. But that amount of available volume eliminates a concern on the supply side. In fact, it will serve to moderate and put some downward pressure on pricing whether or not it is extracted.

The key is on the demand side.

Here, several factors are emerging to portend higher prices. Once again, we need to keep this in perspective. My estimate remains for an average price of about $4.35 come high summer, absent any unforeseen developments, with an increase to $4.85 to $5.15 by the end of 2014.

Not a major advance, but enough to kick start an entire sector.

Why?

Because of five underlying reasons, all of which I have discussed in previous issues of Oil & Energy Investor. Each has been enhanced by the period of reduced prices since lower prices will always encourage greater energy use. As the reliance increases with the usage levels, so will the commodity price.

Five Factors to Consider in Natural Gas Prices
First, broad based industrial use has finally returned and exceeded pre-crisis levels. This is always the last of the main traditional demand areas to return after a recession (and the most recent was the worst in seventy years).

Second, natural gas is replacing oil as a feeder stock for petrochemicals – everything from ingredients used in the production of plastics to fertilizers and widely used chemicals. This flow is actually increasing quicker than I had initially anticipated.

Third, we continue to witness a move to liquefied natural gas (LNG) and compressed natural gas (CNG) as a vehicle fuel. The transition remains primarily noticeable in higher end trucks, with the emphasis on passenger vehicles still awaiting cost reductions. Nonetheless, heavy truck, bus and equipment fleets are moving to natural gas.

However, it is the last two categories that are the main stimuli.

Fourth is the move from coal to gas for the production of electricity, a development occurring more rapidly than even the rather optimistic predictions I made last year.

The background is this.

The U.S. will retire at least 90 GW of capacity by 2020, with an additional 20-30 GW likely from the imposition of EPA non carbon emission standards (mercury, sulfurous and nitrous oxides). Most of this capacity is currently fueled by coal.

Last year, I estimated that for each 10 GW transferred, 1 billion cubic feet of natural gas per day would be required. Well, based on the initial figures, it’s actually coming in at 1.2 billion. It sets up this startling conclusion. If half of the transition I expect from coal to gas actually takes place, it will eat up three times the current volume in storage.

Certainly, some of that will be offset by increasing production. But the operators have learned that flooding the market does not help any of them. That is another lesson taught by the shale gas age.

Finally, we have the advent of LNG exports from the U.S. and Canada. These are not likely to begin in earnest until late 2014, but will transform the sector. From providing none of the current global LNG trade, the U.S. will account for at least 9% within ten years.

For those concerned about what the exports will do to domestic end user costs, remember there is plenty of spare volume capacity waiting to be drilled. In short, this is not going to be an increase in exports at the expense of rising costs at home. There is plenty to satisfy both.

Once again, the key here is balancing production. As we move into this new gas age, remember this: LNG exports will act as a primary outlet for excess shale gas extraction. The greater the exports, the lower will be the volatility in pricing at home.

We are, therefore, watching a number of new investment opportunities emerging as the gas market shakes itself out. This is not a tide, but more like a series of escalating ripples, and it is not going to raise all boats.

How should the individual investor play this?

That will be the subject of my next article. So stay tuned.

[Editor's Note: Dr. Kent Moors is one of the most renowned and most connected oil and energy experts in the world. His Energy Inner Circle is an invitation into his private world of high-level energy contacts, where he recommends companies most likely to be impacted ahead of the seismic changes within the energy sector.

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