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Polar Vortex and Shale Gas Primary Drivers of Recent Natural Gas Prices

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With shale gas driving prices lower over the last few years, in addition to a lack of extreme winters or summers, a 10-year low for NYMEX was reached in April 2012. And certain long-term strips hit new all-time lows in November 2013. However, since that time, the Polar Vortex and its impact on natural gas heating demand, caused spikes in spot gas and power prices in the Northeast US, creating a huge gas storage deficit, pushing NYMEX natural gas futures to five-year highs.

Longer term prices for 2015 and beyond have moved less than the 2014 prices, and are now trading at a discount, although they have risen somewhat since November. Why have these prices moved less, and is there risk in the long-term?

The lack of movement is due to the market’s focus being squarely on the near-term weather and storage. And long-term upside is limited by ongoing growth in shale gas production. Don’t ignore bullish long-term fundamentals, and here’s why:

  1. Beyond shale, LNG exports and the impact of EPA regulations on coal generation are both supportive of long-term natural gas prices.
  2. The economics of shale gas limit both upside and downside, as drillers must cover their operating costs.

Since shale gas has received the most attention, let’s explore the potential bullish impact of LNG exports and EPA regulations on future energy prices.

An article from Natural Gas Intelligence (NGI) highlights that the Department of Energy recently granted approval for LNG exports to non-FTA countries by the Jordon Cove Energy Project LP. This project will export up to 0.8 Bcf/day of LNG, likely sourced from Canada, from a terminal in Coos Bay, Oregon. This is the seventh project to receive critical approval to export to non-FTA countries with a total potential export total of 9.27 Bcf/day from these projects.

The primary driver of these projects is the severe discount of U.S. natural gas prices compared to the rest of the world, due to the shale gas revolution. But while Jordon Cove is likely to ship supplies to Asia, the overall momentum for LNG exports is supported by the recent geopolitical events in Ukraine. Key U.S. allies in Europe, including Germany and Italy, rely heavily on Russia for energy supplies, some of which flow through Ukraine, and have been interrupted by the Russians at least twice in the last decade. Delivery of U.S. natural gas supplies to Europe would provide an additional energy alternative to the Europeans and would reduce reliance on the Russians, a very attractive concept in light of Russia’s recent annexation of Crimea. Opposition by manufacturing and petrochemical companies remains strong, but eventual LNG exports later in this decade seems likely and could absorb a significant quantity of shale gas, thereby supporting prices.

The bullish impact on energy prices from EPA action is through MATS (Mercury and Air Toxics Standards) that specifically targets the coal industry and in particular, electricity generation plants that utilize coal as a fuel source. Sixty-nine percent of coal plants are already in compliance with MATS that require compliance in 2015 or 2016 due to certain potential exemptions. That means that 31 percent must either take action to comply or must retire, and at this point, 8 percent have announced retirement and another 16 percent are questionable.

What will compensate for this lost generation? Renewable growth will help, but it isn’t enough. Natural gas generation is the primary answer due to the ability to build plants relatively quickly and due to the low price of natural gas due to shale. This significant growth in gas generation will absorb shale supplies and is another factor in the long-term gas outlook. In fact, coal-to-gas switching has already been occurring over the last three years – sometimes due to the economics of cheap gas, and sometimes due to coal plant shutdowns because of regulatory action.

There are many factors driving natural gas prices today, but near-term weather and shale gas are the current primary drivers. Don’t ignore factors that might be evolving slower, and may not be in the headlines. These secondary factors may have significant potential to push energy prices higher over time. And as the winter ends, focus will shift away from the Polar Vortex, and long-term price stability could again be at risk.

Posted: April 03, 2014