Natural Gas Market Prices and the Related Market Outlook

Energy & Resources

By George Adams

Natural gas prices on the New York Mercantile Exchange (NYMEX) front-month Henry Hub futures index settled at $2.35 per million British Thermal Units (MMBtu) on Thursday, January 19th. A front-month contract has not ended daily trading that low since March 5, 2002, nearly 10 years ago. There are several recent factors that have affected current natural gas prices. The most significant are the relatively mild winter in North America, the higher-than-average storage levels of natural gas and the abundant production due to the development of the Bakken, Marcellus and Utica shale plays.

There are a few exceptions to the above-noted price declines. The New York and New England markets had price increases of $2.04 and $1.80, respectively, due to expected cold weather in those regions. In addition, the Pacific Northwest posted a relatively small increase of $.04 per MMBtu, most likely related to a cold weather spell.

The ExxonMobil energy outlook predicts that the demand for natural gas will increase by more than 60 % by 2040. This takes into account advances in technology as well as development in many countries that are currently considered “Third World” or underdeveloped. This study believes that efforts to reduce carbon emissions around the world will lead to natural gas becoming the fastest growing fuel in terms of consumption in the next 30 years. This will result in natural gas becoming the number-two most consumed fuel by 2040.

So what does all this mean for the near term price expectations of natural gas? Many analysts expect the price for natural gas to remain flat for the next 1-2 years. This is mainly related to the current supply glut in the market and the lack of facilities to export gas outside the U.S. There are plans underway to construct Liquefied Natural Gas (LNG) export facilities, but those most likely will not come on-line until 2015.

This creates an opportunity in the U.S. to convert existing technologies to run on natural gas. There have already been plans to convert coal-fired electric power generation plants to dual-fuel plants powered by natural gas and coal. In addition, plans for new natural gas powered plants are in the works. The other area of opportunity is to build an infrastructure of Compressed Natural Gas (CNG) fueling stations that would encourage automobile manufactures to produce vehicles that can run on natural gas. There have been some significant investments in that area, but it remains to be seen how long it will take to develop the network of fueling stations required to make CNG a mainstream fuel.

There are various factors that could impact the price of natural gas, including weather or other political developments. Unless these opportunities for new technology are pursued, it appears that natural gas prices will either remain flat or slightly decrease.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.

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