Light at the End of a L-O-O-N-G Tunnel???
Cold weather aside, the multi-year outlook for US natural gas supply looks fairly glutted, leading to a “BTU Bargain” as far as the eye can see. Even off the bottom, the 2015-2020 futures trade, between $4-4.50 per million BTUs – about a quarter of energy parity with crude oil, against which most of the rest of the world’s natural gas is priced. And, a cynic might think (right or wrong!), the only reason for $4.50 gas “out there” is that the near term strip has spiked due to outsized seasonal demand.
In search of the contrarian view, other factors are worth a look. The greatest challenge facing the North American Shale (Unconventional) Hydrocarbon Revolution is “How do we encourage demand?” to balance our markets. Particularly for natural gas, which doesn’t move too well without significant infrastructure (pipes, combustion, liquefaction, etc), its been really expensive to consume this geological/technical blessing. Transportation demand, however economic, is slow to develop, but is moving apace. The first LNG exports are unlikely before 2016, but should grow to 10+ % of supply by 2020. ‘Everybody knows this.
Well, a well connected friend of ours has observed a less obvious trend which might measurably help to narrow this imbalance. A survey of producers suggests an additional 5 Bcf/day of Mexican demand for natural gas – 4X the 2010 level (US used to be a net importer of Mexican gas!). However, customers are forecasting around 15 Bcf/d later this decade!! While the Texan shale formations do extend into Mexico, the other skills and infrastructure necessary to develop the resource are years away. Meanwhile, conventional production is declining as industrial demand follows the latest version of the Mexican Miracle.
The Skeptical Analyst has learned to discount optimistic sellers more than their customers, making this a more distinct possibility than under more conventional conditions!! At 15 Bcf/d, this demand might comprise 15-20% of US supply.
On top of the expected LNG boom, new industrial/petrochemical capacity, and the “will they or won’t they” role of coal fired power and industrial transportation, one might contrive a multi-year bullish scenario for natural gas prices – defeating the seemingly perpetual $4.50 ceiling for the fuel.
Risks abound, of course – the Mexican Revival, overzealous tracking and transport regulation, much lower domestic crude prices, and even competitive shale booms. But most of these seem unlikely before 2020. Weather adjusted, the next couple years might be a bit bumpy, but if you invest for change, pay attention!