Reeling from record high gas prices, falling home values and an uncertain employment outlook, American consumers may be forced to open up a new front in the war on consumption. The cost of natural gas, which generates around 20% of U.S. electricity, is approaching historical levels of its own
A report this morning in The Wall Street Journal outlines the global supply-demand outlook for natural gas, which has risen 93% since last August (see chart below). Its price usually moves in similar patterns to that of crude, but until very recently has lagged oil's big move (see second chart).
Click to enlarge image
Click to enlarge image
Surging global demand for power is partly to blame for higher prices, but on its own doesn’t explain the recent jump. The ability to transport liquefied natural gas, or LNG, means it’s no longer just a regional commodity. According to The Journal, LNG can be moved in a fraction of the space required to transport it in conventional form, making it easy to ship all over the world. Countries thirsty for LNG simply pay a higher price for it to arrive at their docks.
I spoke with a hedge fund energy analyst who gave me the following rundown of why prices have risen now, when these fundamentals have been in place for a number of years.
LNG, he explained, sells in Asia for nearly twice what it does in the U.S. Since producers are more inclined to sell for the highest price, U.S. imports will likely stay at record lows. The bid in Japan and South Korea should remain strong, as both countries struggle with problematic nuclear power plants that must be supplemented by gas-fired generation.
Coal shortages at many American utilities like Exelon Corp (EXC), Ameren (AEE), Dynergy Inc (DYN) and PPL Corp (PPL) will force them to run gas plants to preserve coal stockpiles for the summer, even if it's more costly to do so. Compounding the issue, water shortages in key areas of the country will make coal and nuclear plants less attractive since they use far more water than do gas generators. Plans for a number of coal burning plants have been canceled recently, further inflating the demand for LNG.
Higher prices would benefit natural gas producers like Anadarko Petroleum (APC), Sandridge Energy (SD), Equitable Resources (EQT) and Forest Oil (FST).
Looking into the future, Europe in 2012 will stop offering free carbon dioxide permits for coal burning power plants. Operators are likely to shutter these dirty generators and switch over to natural gas. If the U.S. Congress passes carbon emission restrictions, demand for clean electricity will likewise take off.
Historically speaking, gas is currently cheap relative to crude. But domestic natural gas storage levels are below average, and forecasts of a hotter than normal summer and active hurricane season this fall could force prices upwards.
None of this happened overnight, so many wonder why natural gas is just now beginning to catch up with crude prices. The analyst I spoke with said it’s a culmination of the above factors and cautioned that prices won’t reflect events until they actually happen.
If there’s one thing Americans don’t need, its higher prices on something they aren't prepared to live without. Lights and air conditioning on hot summer nights certainly fit the bill.
Reprinted by Permission copy write 2008 Minyanville Publishing and Multimedia
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