Oil prices have been the talking point over the past few years, as the supply glut has brought commodity prices to near sseven-yearlows. Natural gas was one of the worst hit commodities. This time in 2014, the Henry Hub Natural Gas 1 Month futures contracts were soaring above the $4/MMBtu mark, leading investors to believe that higher prices would be sustained.
A number of US liquefied natural gas (LNG) export projects were also in the pipeline throughout the year following US 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 $3/MMBtu, a substantial recovery to the lows of just above $2/MMBtu seen in 2016, yet well below 2014 levels.
High storage levels and milder temperatures have been to blame and are anchoring, albeit at a slower pace, natural gas prices at current levels. Despite increased demand for power generation since 2014, 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 late 2016 to cut production levels produced a small relief to the energy sector following many reconsidered plans, of these, numerous US liquefied natural gas export projects, when OPEC failed to reach production cut agreements in previous meetings.
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 has, however, 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 numerous US export projects initiated in 2017 so long as a price recovery remains sluggish, 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 near 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 will depend on Opec and the US, given current market conditions. Having said that, the US faces a strong possibility of becoming the leading global LNG exporter over the longer term. So long as drilling production efficiency is sustained, US export companies are in line to transform global LNG demand, though mutual agreements with Opec would be needed to manage price levels to enhance these projects.
Disclaimer:
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. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.