Five Reasons Behind the Rise in Natural Gas Prices

by | published March 15th, 2013

Not long ago, the market was laboring under expectations that the NYMEX futures contract for natural gas would remain at around $3 per 1,000 cubic feet (or million BTUs).

The pundits were proclaiming that a surplus of shale gas, over production, and historic storage surpluses translated into long-term discounted pricing.

Last year’s historically warm winter over much of the U.S. had not helped the price either.

While this year the weather is more seasonal, there are other factors in the price rise. For the investor this means there will be plays developing in specific areas that were simply nonexistent six months ago.

Make no mistake, we are not about to go back up to the $12 plus levels experienced a few years ago. Those days may be gone forever – one of the tangible impacts of the unconventional gas revolution (shale, tight, coal bed methane).

There will still be volatility in this sector as the ongoing balance between extraction potential and well counts works itself out.

But we are likely to move into a manageable pricing dynamic.

And that means for natural gas investors – with apologies to Sherlock Holmes – the game’s afoot!

A Change in Market Drivers Takes Place

Natural gas pricing used to be largely about how cold were winters and hot were summers.

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 near 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 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.


Because of five underlying reasons, all of which I have discussed in previous issues of OEI. 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 as 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, the last two categories are the main stimuli.

Fourth is the move from coal to gas for the production of electricity, a development occurring most 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 today’s capacity is 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, that I 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 Monday’s OEI.



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  1. Bob
    March 15th, 2013 at 18:45 | #1

    Did you see the recent study done by Charles River Associates for Dow Chemical that blasts the idea of exporting US LNG? The study projects that gas prices will more than doubled for US end users, resulting from LGN exports.

  2. Robert H. Bartlett, Sr.
    March 15th, 2013 at 22:25 | #2

    The distribution facilities and delivery systems seem to be lagging far behind the current and future production capacity.

    The “Boom” will be meaningless unless the it is obtainable at the local Gas Stations and Truck Stops !

  3. enthusceptic
    March 15th, 2013 at 22:48 | #3

    In the dveloping -that’s most of the – world, any light vehicle that does any serious mileage runs on LPG or CNG. In North America ignorance and a lack of infrastructure are the real problems, I think.

  4. Steve Taylor
    March 16th, 2013 at 04:46 | #4

    I understand the EPA will release it’s fracking study in early 2014. One newsletter writer claims Obama will use an exec order to ban fracking in the US as a result. Comment in your alert if possible.

  5. ralph
    March 16th, 2013 at 09:46 | #5

    it cannot be that LNG exports-production thru true exported sale/shipment- will moderate volatility stateside……these effects will trigger even wider price rise domestically as world price opportunity fronts are established and running.
    The largess of fabulously increased gas wells/reserves have always been moving forward for export (read: better profit/margins etc.) purposes. It was made more palatable by “informing” USSA citizens of great exploring, drilling and production gains towards a greater energy independence…..and who’s to argue or find fault with that?
    The trans/cont pipeline will go forward with such amerikan spirit in the guise of helping ensure gas price availability,stability of price and supply. Which is a lie. It will mean giant exports thru LA terminals @ huge profits in the global market. And our domestic suppliers will provide us with sufficient gas @ always increasing prices reflective of that. But said price rises will be at gradual annual amounts just short of protest and reflective also of PUC approvals/justification…….

  6. Richard
    March 18th, 2013 at 14:45 | #6

    I understand their is a shortgage of helium currently and helium is captured in drilling for natural gas. Will the expanded natural gas resources also provide new resources for helium? Which companies are involved in providing helium?

  7. jerry malinab
    March 18th, 2013 at 18:30 | #7

    yes, to natural gas this is the best of the best……lovely like, Ford,carneige, Morgan Stanley, Jp Morgan,Vanderbelt and the favorite … Rockefeleir. I love this program… thank you so much its nothing but fortunate…boom bbcode…appreciate…

  8. Kevin Beck
    March 21st, 2013 at 18:38 | #8

    The alternative to the possibility of exporting natural gas in the future is that we keep it bottled up in America. While this would be fine for the end-users, it would be a negative for the producers. By keeping the production trapped here, we guarantee that prices will remain out of balance with the rest of the world, with a high likelihood that there will be periods when the prices fall below the cost of production. When that happens, then you could have supply disruptions within our country, at the same time there would be a large surplus within America. This would cause disruptions for the producers, and lower incomes for their employees.

    The question is: Do we develop an energy policy that favors the users of the commodity or the producers? And if America is producing more than what can be used, should the producers be able to sell it at a world price (that might be higher than the domestic price), or do we have a situation where the producers are flaring it off at the wellhead?

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