Could 2017 Be A Banner Year For Natural Gas?
By Martin Tillier - Jan 07, 2017, 7:00 AM CST
2016 was, in the main, a decent year for those who believe in the huge potential of U.S. natural gas. Chronic oversupply and a consistent build in reserves saw the price of the commodity fall dramatically in 2014 and 2015, but it bottomed in February of last year and has been recovering ever since. Despite that, prices are still around 50 percent lower than the peak three years ago, but there are good reasons to believe that the rally in gas prices will continue this year.
(Click to enlarge)
President-elect Trump has made it clear that he intends to be friendly to U.S. energy and to unleash the potential of the country’s energy reserves. From a commodity price perspective though, the effects of a fossil fuel friendly administration and Congress are not straightforward. Increased U.S. oil supply, for example, could easily offset the planned OPEC production cuts, while making it less likely that all parties will stick to any agreement. It could be argued that encouraging more production in the already oversupplied natural gas market will also hold prices back, but there are a couple of significant differences.
Firstly, the domestic demand for U.S. gas is still increasing steadily. The Obama administration encouraged utilities to switch from coal and oil powered plants to natural gas, which was seen as a cleaner alternative. Even if the new President reverses that policy the changes that have already been made will not be reversed. Around one third…
2016 was, in the main, a decent year for those who believe in the huge potential of U.S. natural gas. Chronic oversupply and a consistent build in reserves saw the price of the commodity fall dramatically in 2014 and 2015, but it bottomed in February of last year and has been recovering ever since. Despite that, prices are still around 50 percent lower than the peak three years ago, but there are good reasons to believe that the rally in gas prices will continue this year.
(Click to enlarge)
President-elect Trump has made it clear that he intends to be friendly to U.S. energy and to unleash the potential of the country’s energy reserves. From a commodity price perspective though, the effects of a fossil fuel friendly administration and Congress are not straightforward. Increased U.S. oil supply, for example, could easily offset the planned OPEC production cuts, while making it less likely that all parties will stick to any agreement. It could be argued that encouraging more production in the already oversupplied natural gas market will also hold prices back, but there are a couple of significant differences.
Firstly, the domestic demand for U.S. gas is still increasing steadily. The Obama administration encouraged utilities to switch from coal and oil powered plants to natural gas, which was seen as a cleaner alternative. Even if the new President reverses that policy the changes that have already been made will not be reversed. Around one third of American electricity now comes from gas powered plants, and that will not decrease any time soon. If Trump pursues the expansionist policies that he has laid out they will result in increased energy demand, and natural gas is poised to benefit more than at any time in the past.
Perhaps the biggest reason that gas prices will stay on their upward path, however, is the prospect of increased exports. Exports of natural gas from the U.S. started at the end of last year and given the huge price differentials between the U.S. and the rest of the world should logically increase rapidly. The thing standing in the way of that logical move until now though has been the lack of infrastructure for transporting and exporting the commodity.
If we take the President elect at his word, though, energy infrastructure is going to be an area of focus early in the new administration. If the executive branch does shift to prioritizing pipeline construction over ecological concerns then natural gas stands to benefit quickly as distribution improves to cut into the high storage levels and facilitates an increase in exports.
I have no doubt that the volatility that we have seen in the natural gas market will stay with us for a while, but the clearly defined upward trend in prices should do the same. On that basis 2017 could well be a banner year for natural gas.
