Too much of a good thing can be wonderful.
Just ask ordinary American consumers and industries such as petrochemicals that have benefited from a multiyear glut in natural gas.
Now, though, evidence is mounting that the bonanza is nearing its end. The question isn’t merely if or even when the surfeit eases but how sharp the impact might be on prices. After so many years of cheap fuel, the consequences of sharp and lasting appreciation may be particularly jarring to business plans that extrapolated depressed gas prices ad infinitum.
At face value, there doesn’t seem to be much happening yet. Futures prices around $2.80 per million British thermal units are higher than the sub-$2.00 level many predicted earlier this year, but that is seen as a temporary consequence of a hot summer that stoked air-conditioning demand. The amount of gas in U.S. underground storage in the week ended August 26 still was at an all-time seasonal high, up nearly 9% from a year earlier.
That surplus could be erased by a single frigid winter, while supply and demand suggest a balanced market ahead. Onshore natural-gas production fell in June for the fourth consecutive month, according to the U.S. Energy Information Administration. The number of rotary rigs drilling for gas in North America touched an all-time low last week of 81, according to Baker-Hughes. Eight years ago this week, it had reached an all-time high of 1,606.
At the same time, the historic cheapness of gas has stoked demand for it as a power generation fuel. Two decades ago, the U.S. electricity sector used over 4½ times as much coal by energy value as natural gas. Last year, it was 1.4 times and the shift has continued. The EIA said in March that this year should see gas use overtake coal for the first time ever. U.S. power producers consumed a seasonal record amount of gas in June, up 9% from a year earlier, while coal shipments by rail are down by over 25% year-to-date, according to the Association of American Railroads.
Naturally there are industries for which the collapse in gas prices over the past eight years was anything but wonderful. Only some would recover if prices were to rise sharply, though. For example, coal miners and related industries such as railroads probably won’t enjoy a reversal of the fuel’s epic decline as closed plants are gone forever. Owners of non-gas forms of power generation such as renewables or coal and nuclear plants, on the other hand, might benefit as wholesale power prices follow gas prices higher. Last but not least, domestic gas producers such as Chesapeake Energy CHK 5.60 % and Exxon Mobil XOM 0.67 % or oilfield-service providers such as Halliburton HAL 0.67 % would receive a direct boost.
But, unlike the early 2000s, price gains will be meaningful rather than crushing. Along with cheaper gas abroad, they may cause businesses such as exporters of liquefied natural gas or fertilizer plants to slash profit projections and halt new projects, but might not be severe enough to shut them. The reason is vast new resources unlocked by fracking that can quickly bring the market into equilibrium.
After years in the dumps, market forces may finally be bringing an end to a period when gas was basically inert.
Recommended Reading: source WSJ
Additional Reading : Market Realist