Solar and Wind Will Drive Natural Gas

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The price of natural gas in the U.S. has about doubled in a bit less than a year despite the fact that U.S. production has actually increased by about 5%. This is due in part to new horizontal drilling techniques being applied to recently developed vast “unconventional” gas fields in the U.S. and Canada. So it might seem like the price of gas has gotten ahead of fundamentals. But there are good reasons to be bullish about gas prices longer term.

The price of natural gas in the U.S. has about doubled in a bit less than a year despite the fact that U.S. production has actually increased by about 5%. This is due in part to new horizontal drilling techniques being applied to recently developed vast “unconventional” gas fields in the U.S. and Canada. So it might seem like the price of gas has gotten ahead of fundamentals. But there are good reasons to be bullish about gas prices longer term.

Natural gas is inherently cheap on two scores. One is that the BTU equivalency of gas to oil would price gas around $23 per Mcf, nearly double its current price. Also, gas is the cleanest burning fossil fuel, so it should be advantaged if and when carbon taxes are passed to deal with climate change.

Gas is a regional market and supplies in Europe and Japan are tighter than in the U.S. Thus prices are higher there, allowing them to outbid U.S. LNG terminals for imports, which has virtually eliminated LNG supply coming to North America. Moreover, European and Asian gas supply prospects may be even tighter after 2009, as discussed here, which would continue to preclude LNG supplies from the U.S. market absent much higher prices.

Meanwhile demand for North American natural gas is growing from a number of markets including fertilizer and Canadian oil sands production. In the future natural gas demand for transportation and electricity production will grow. A strong marketing effort to promote natural gas for buses, delivery trucks, and other heavy urban vehicles like garbage trucks, is one source of future rising demand. Reports are starting to surface of people converting cars from gasoline to natural gas, a common practice on other continents.

A second important market likely to strengthen in near future years is electric power generation. That market is turning strongly away from coal in the U.S. and Europe and toward alternatives like solar and wind which are non-base load sources, meaning they work during some days and some hours a lot better than others. When they don’t work, the generating plants must have “peaking capacity” to bring them quickly up to nameplate capacity. Natural gas is the way to obtain short term bursts of generating capacity.

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