A Mini Natural Gas Market Analysis
The recent natural gas (NG) price free drop triggers interests in this market. A contrarian view is that a strong rebound in NG can be expected when NG's potentials are fully explored. Indeed, NG has gone through a volatile decade while huge swag, from over $8 to current about $2 per unit. The warm weather is commonly considered the culprit of the recent drop as well as larger supply from shale gas. However, overall NG demand has also been up since 2001. So how is the big picture ?
We start with the U.S. market then look at the global market. The resources involved here are mainly from NSGA (www.naturalgas.org) and EIA (referred by NSGA).
NG is not currently regulated product in the U.S., unlike years ago. So NG is much more open to competition and choice. After NG is collected by producers at the well, wellhead prices are no longer regulated; meaning the price of natural gas is dependent on supply and demand interactions.Interstate pipelines once participate NG ownership. Now interstate pipelines no longer take ownership of the natural gas commodity. Pipelines only provide transportation means, which is still under federal regulation. Local distribution companies (LDCs) offer bundled products (electricity and gas) to end customers. End users may purchase NG directly from producers or LDCs.
Besides the roles of producers, LDC, pipeline transportation, end users, there is another player, NG marketer, in NG food chain. Marketers help to store, move, and trade NG in the market. It is important to note that the actual ownership pathway of the gas may be significantly more complicated, as the marketer or the LDC are not the final users. Either of these two entities may sell directly to the end user, or to other marketers or LDCs. That makes the NG market actually very open and very competitive. Price drops may weed out weaker players in the market so investors need to look for the ones who laugh at the end.
According to the Energy Information Administration's (EIA's), the United States accounted for over 25 percent of total worldwide consumption in 1999. Most of the natural gas that is consumed in the United States is produced domestically, with the balance of dry natural gas being imported mainly from Canada. LNG (liquefied NG) is also imported to serve demand.
The biggest domestic supply is from TX and LA, which comprise of over 50% capacity. NG is currently largely used in electricity generation and industrial usage, which take up to about 60% demand. Even NG vehicle use has been steadily grown in the past years, it is in its infancy. But it is rather very promising, especially when NG price is low. This is from NGSA's statement:
Demand from the transportation sector accounts for 3 percent of total U.S. natural gas demand, and most of this demand is for natural gas to fuel the pipeline transportation of hydrocarbons. Natural gas supplies barely a fraction of the total energy used in the transportation sector, and the demand for natural gas to supply natural gas vehicle operation is almost negligible compared to the energy requirements of traditionally fueled vehicles. The demand for alternative fuel vehicles (including natural gas vehicles) is expected to increase in the foreseeable future primarily due to new legislation and regulation surrounding emissions from the transportation sector. As more stringent emissions standards are adopted, both at the federal and state level, the automotive industry will have no choice but to devote significantly more resources into the development of feasible production line natural gas vehicles; vehicles that are environmentally sound and meet consumer preferences. However, the technology required to do so, including the need for a natural gas refueling infrastructure, are current barriers to the widespread proliferation of natural gas vehicles in the United States.
Although lower NG prices ignite hope of larger demand and thus higher price, there are known cases that we are not taking this advantage at our benefit. An example is that one of the largest NG producing state, Texas, was found using less and less NG.
A report just out by University of Houston professor Michael J. Economides and consultant Philip E. Lewis, “Texas Natural Gas: Fuel for Growth.” The report indicated that Texas oddly has been using less and less natural gas to make electricity while the rest of the country has been using more and more. The numbers are dramatic. Nationwide, the amount of electricity generated from coal dropped roughly 20 percentage points, from about 80 percent in 1995 to about 60 percent in 2011, while the gas-generated share climbed from about 20 percent to almost 40 percent. In Texas, despite the superabundance of local shalegas, the trend has been almost the opposite. The gas share in electricity production, instead of increasing by 15-20 percentage points since 1995, has dropped a couple of points. And coal’s share, instead of shrinking by 15-20 percentage points, has contracted by only a few points
There is no obvious explanation why this happened. The professor conducted this report suspected that it may have something to do with regulation. The document chain is much longer to open a new gas-fired generating plant than a coal one in TX than other states. TX thus lost tax revenue to other states along this path. Hence, NG regulation regulation is important to price. President Obama has proposed a NG roadmap as part of national energy policy. So we should see improvement in this regard in the coming years.
Now we look at the global NG market.
Because LNG shipment has become safer, an LNG market opened up in the late 1980s and 1990s. More efficient gas-fired power plants were built and became popular. Since 2001, the total volume of LNG shipped has doubled to reach 496 million cubic meters, the energy equivalent of about one and a half billion barrels of oil. Between 2009 and 2010 alone, world trade grew by 22.6 percent. The jump in 2010 certainly link to Japan's earthquake and nuclear plant leakage threat.
Qatar is the largest NG exporter, who exports about a quarter of the world’s LNG—all of which travels through the recently troubled Strait of Hormuz. The country harvests its supply from the South Pars/North Dome gas field, the largest in the world, which it co-owns with Iran. A strained U.S.-Iran relationship may threaten NG supply.
On the demand side, Japan is responsible for nearly a third of total imports. Gas-fired power has risen so sharply that it recently edged out oil-fired generation in terms of megawatts of electricity produced. Post-Kyoto and post-Fukushima, that trend will surely continue. Again, energy safety may be undermined if Strait of Hormuz is in trouble.
Here are some concluding remarks:
The lower NG prices will further open up this market. Reduced production due to lower price will also help price rebound. All involved parties, producers, LDCs, marketers, are reacting to predicated warmer weather and higher supply. So we think NG prices stay below $2 is not sustainable.
Resources:
www.naturalgas.org
http://naturalgas.org/business/analysis.asp
http://naturalgas.org/business/demand.asp
www.ieee.org
We start with the U.S. market then look at the global market. The resources involved here are mainly from NSGA (www.naturalgas.org) and EIA (referred by NSGA).
NG is not currently regulated product in the U.S., unlike years ago. So NG is much more open to competition and choice. After NG is collected by producers at the well, wellhead prices are no longer regulated; meaning the price of natural gas is dependent on supply and demand interactions.Interstate pipelines once participate NG ownership. Now interstate pipelines no longer take ownership of the natural gas commodity. Pipelines only provide transportation means, which is still under federal regulation. Local distribution companies (LDCs) offer bundled products (electricity and gas) to end customers. End users may purchase NG directly from producers or LDCs.
Besides the roles of producers, LDC, pipeline transportation, end users, there is another player, NG marketer, in NG food chain. Marketers help to store, move, and trade NG in the market. It is important to note that the actual ownership pathway of the gas may be significantly more complicated, as the marketer or the LDC are not the final users. Either of these two entities may sell directly to the end user, or to other marketers or LDCs. That makes the NG market actually very open and very competitive. Price drops may weed out weaker players in the market so investors need to look for the ones who laugh at the end.
According to the Energy Information Administration's (EIA's), the United States accounted for over 25 percent of total worldwide consumption in 1999. Most of the natural gas that is consumed in the United States is produced domestically, with the balance of dry natural gas being imported mainly from Canada. LNG (liquefied NG) is also imported to serve demand.
The biggest domestic supply is from TX and LA, which comprise of over 50% capacity. NG is currently largely used in electricity generation and industrial usage, which take up to about 60% demand. Even NG vehicle use has been steadily grown in the past years, it is in its infancy. But it is rather very promising, especially when NG price is low. This is from NGSA's statement:
Demand from the transportation sector accounts for 3 percent of total U.S. natural gas demand, and most of this demand is for natural gas to fuel the pipeline transportation of hydrocarbons. Natural gas supplies barely a fraction of the total energy used in the transportation sector, and the demand for natural gas to supply natural gas vehicle operation is almost negligible compared to the energy requirements of traditionally fueled vehicles. The demand for alternative fuel vehicles (including natural gas vehicles) is expected to increase in the foreseeable future primarily due to new legislation and regulation surrounding emissions from the transportation sector. As more stringent emissions standards are adopted, both at the federal and state level, the automotive industry will have no choice but to devote significantly more resources into the development of feasible production line natural gas vehicles; vehicles that are environmentally sound and meet consumer preferences. However, the technology required to do so, including the need for a natural gas refueling infrastructure, are current barriers to the widespread proliferation of natural gas vehicles in the United States.
Although lower NG prices ignite hope of larger demand and thus higher price, there are known cases that we are not taking this advantage at our benefit. An example is that one of the largest NG producing state, Texas, was found using less and less NG.
A report just out by University of Houston professor Michael J. Economides and consultant Philip E. Lewis, “Texas Natural Gas: Fuel for Growth.” The report indicated that Texas oddly has been using less and less natural gas to make electricity while the rest of the country has been using more and more. The numbers are dramatic. Nationwide, the amount of electricity generated from coal dropped roughly 20 percentage points, from about 80 percent in 1995 to about 60 percent in 2011, while the gas-generated share climbed from about 20 percent to almost 40 percent. In Texas, despite the superabundance of local shalegas, the trend has been almost the opposite. The gas share in electricity production, instead of increasing by 15-20 percentage points since 1995, has dropped a couple of points. And coal’s share, instead of shrinking by 15-20 percentage points, has contracted by only a few points
There is no obvious explanation why this happened. The professor conducted this report suspected that it may have something to do with regulation. The document chain is much longer to open a new gas-fired generating plant than a coal one in TX than other states. TX thus lost tax revenue to other states along this path. Hence, NG regulation regulation is important to price. President Obama has proposed a NG roadmap as part of national energy policy. So we should see improvement in this regard in the coming years.
Now we look at the global NG market.
Because LNG shipment has become safer, an LNG market opened up in the late 1980s and 1990s. More efficient gas-fired power plants were built and became popular. Since 2001, the total volume of LNG shipped has doubled to reach 496 million cubic meters, the energy equivalent of about one and a half billion barrels of oil. Between 2009 and 2010 alone, world trade grew by 22.6 percent. The jump in 2010 certainly link to Japan's earthquake and nuclear plant leakage threat.
Qatar is the largest NG exporter, who exports about a quarter of the world’s LNG—all of which travels through the recently troubled Strait of Hormuz. The country harvests its supply from the South Pars/North Dome gas field, the largest in the world, which it co-owns with Iran. A strained U.S.-Iran relationship may threaten NG supply.
On the demand side, Japan is responsible for nearly a third of total imports. Gas-fired power has risen so sharply that it recently edged out oil-fired generation in terms of megawatts of electricity produced. Post-Kyoto and post-Fukushima, that trend will surely continue. Again, energy safety may be undermined if Strait of Hormuz is in trouble.
Here are some concluding remarks:
The lower NG prices will further open up this market. Reduced production due to lower price will also help price rebound. All involved parties, producers, LDCs, marketers, are reacting to predicated warmer weather and higher supply. So we think NG prices stay below $2 is not sustainable.
Resources:
www.naturalgas.org
http://naturalgas.org/business/analysis.asp
http://naturalgas.org/business/demand.asp
www.ieee.org
posted by Intl.investment.services at
6:24 PM
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