Oil prices have been the talking point over the past year, as the supply glut has brought commodity prices to near seven year lows. Natural gas was one of the worst hit commodities.
This time last year the Henry Hub Natural Gas 1 Month futures contracts were soaring above the $4/MMBtu mark, as a delayed winter prepared Americans to increase their heating needs, leading to believe that higher prices were in order. A number of U.S. liquefied natural gas (LNG) export projects were also in the pipeline throughout the year following U.S. plans to become a global exporter of the commodity.
Later in November 2014, however, the Oil supply glut hit, resulting in a sharp plummeting of commodities. Fast forward to today, Natural Gas 1 Month futures stand above $2/MMBtu, with winter again approaching and no indications of higher prices over the short term. (Bloomberg consensus indicate a marginal increase from current levels over the next 12 months).
High storage levels and milder temperatures have been to blame and are anchoring Natural gas prices at current levels. Despite increased demand for power generation throughout 2015, the drilling efficiency of US rigs has pumped continuous supply into already high storage levels and is threatening to keep the market oversupplied.
On a global scale, OPEC’s decision in 2015 to maintain current production levels produced a bigger blow to the energy sector as many plans for 2016 were reconsidered, of these, numerous U.S. liquefied natural gas export projects. A few companies however have seen through their LNG terminals, a number of which were built on the US east coast. With current US natural gas prices lower than in Europe and Asia, US companies would seem at an advantage to benefit.
The global supply glut, however, has increased global competition with foreign crude oil linked companies also exporters of LNG now facing higher demand as a result of lower prices. Alternate fuel sources competing on a price level have also added pressure on LNG companies.
Nonetheless, given the high cost of liquefying and transporting natural gas, US companies still maintain a competitive advantage over their peers. It may be difficult seeing additional US export projects initiated in 2016 so long as prices remain where they are, as added demand for materials and labor would become an inevitable cost burden.
Having said that, the medium term outlook for completed projects may be profitable. With US rig drilling efficiency at all-time highs and given the price advantage the US currently holds over Europe, one may expect US companies to gain European market share going forward from their European counterparts, which consequently would put downward pressure on the pricing power these currently hold in Europe.
Seeing natural gas prices back above $4/MMBtu in the near term is extremely unlikely, given current market conditions. Having said that, the US faces a strong possibility of becoming the leading global LNG exporter over the long term. So long as drilling production efficiency is sustained, US export companies are in line to transform global LNG demand.
This article was issued by Mathieu Ganado, Junior Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.