by Bob Shively, Enerdynamics President and Lead Instructor

Last year — 2012 — was the year that the U.S. fell back in love with natural gas. Prices stayed below a very reasonable $4/MMBtu even as demand grew.  Power  producers switched from coal to gas so rapidly that the percent of U.S. power  generated by coal fell from 44% to 37% while gas generation rose from  25% to 30% in just one year.

Numerous  large industrial gas consumers made long-term commitments to new facilities in  the U.S. based on belief in long-term reasonable gas prices.  And although it received relatively little  fanfare during a news cycle dominated by the presidential election campaign,  gas was largely responsible for the fact that U.S. energy-related greenhouse gas emissions are now at the lowest level since the mid-1990s.

So how does the future look for 2013? Will the romance continue, or will the  blossom start to fade as the relationship deepens?  Several factors must be considered as we attempt  to address these questions. This week I’ll look at issues of supply and demand as well as price. Next week I’ll conclude this discussion by examining  exports, the environment,  infrastructure, and global perspectives.

Supply and demand
Natural gas production in the U.S. is at an all-time high.  And current projections from the U.S. Energy  Information Administration are that natural gas production will continue to  grow significantly.  Often in the past,  production has fallen in periods of ongoing low prices as producers reduce  drilling.  Is it different this time?  Many observers say maybe yes.  Factors include improved drilling and  production techniques that allow gas to be produced at lower costs, investment  in production by consumers, the production of gas as a by-product of drilling  motivated by oil or natural gas liquids production, and the potential for growing domestic and export demand.

Source: AEO 2013 Early Release Overview (http://www.eia.gov/forecasts/aeo/er/early_production.cfm)

Demand is also expected to grow. While residential and commercial demand may be relatively static, industrial and power plant demand should be robust as long as price levels remain reasonable. Manufacturers of steel, machinery, chemicals, and fertilizers now have energy costs in the U.S. that are dramatically lower than costs in the other developed economies. According to the Wall Street Journal, Dow Chemical has compiled a list of 102 big new manufacturing investments in the  U.S. that are due in part to low natural gas prices [1].  And many coal generating units, which have traditionally bumped gas generation  out of the market, are going to be permanently closed. This will result in a  permanent shift to gas generation even if prices rise. And lastly, there is the  possibility of growing use of natural gas for transportation including fleet vehicles and long-distance trucking [2].

Price
Natural  gas prices in the U.S. have remained at low levels for the last three years.

Source: http://www.eia.gov/dnav/ng/hist/rngwhhdw.htm

Given the current robust supply, futures prices reflect a market expectation that  prices will remain low.  In fact, futures prices currently remain below $5/MMBtu until December 2018. But could we be fooled? It has happened before. Already contrarian investor’s websites can be  found saying a cold winter and reduction in drilling rigs could result in a  significant price rise. But given the  current dynamics of the market this seems unlikely. Energy expert Daniel Yergin was recently quoted as saying that both demand and supply can grow for at least a couple of  decades before we see significant gas price increases [3].

Look for next week’s post to continue the conversation as it relates to exports, the environment,  infrastructure, and global perspectives.

References
1. Export U.S. Gas, Yes or No?, Wall Street Journal, November 15, 2012 http://online.wsj.com/article/SB10001424127887324595904578121242654761004.html

2. See All Roads Lead to Natural Gas-Fueled Cars and Trucks, Forbes, December 15,  2012 http://www.forbes.com/sites/kensilverstein/2012/12/15/all-roads-lead-to-natural-gas-fueled-cars-and-trucks

3. See same WSJ article cited above