Although natural gas prices took a beating in the post-Labor Day market—dropping 4.31% to $3.89 per million Btu—recent lower prices in the space could present a real opportunity for the industry, analysts say.
In an interview with Midstream Business, Charles Dewhurst, the natural resources practice lead at BDO USA LLP in Houston, said the regular low natural gas prices highlight the potential for lucrative deals on the LNG export side.
“I think the low prices that we enjoy create an opportunity because of the pricing differential when you look at the market. That’s not to say we should increase our prices in the U.S., but clearly when we’re exporting our LNG to Europe or to Asia, we would be taking advantage of the prevailing prices in those markets, which are significantly higher. That would be a direct benefit for the industry,” he said. “There is a cost, of course, in the liquefaction process and the transportation, but the low prices here would still be plenty sufficient to have a nice margin for exportation.”
In their daily energy and utility note on Sept. 3, analysts at Wells Fargo explained that natural gas’s post-Labor Day pricing represented its largest drop since 2008. Between 2009 and 2013, the price after Labor Day moved down between 2% and 3% with an average decline close to 1.3%.
“We continue to remind investors that sentiment swings to extremes, and there is seasonality in natural gas prices,” the analysts said, adding that there is some room for optimism. “We highlight seasonal activity and observed that over the past 20 years, the October contract has finished higher than the September contract 16 of 20 years with average uptick of 12.5%. This could lead to short-term opportunities within gas-levered names.”
Dewhurst said the low prices mean that domestic consumers enjoy lower-cost heating than their counterparts throughout the world during the coldest months.
The energy industry benefits from those lower prices, too, he said, throughout the supply chain.
“But if you look at petrochemicals in particular, plastics, the natural gas is the primary feedstock for the production of plastics and that’s seen a huge boon for the plastics industry in the U.S., and puts us in a very strong competitive position against plastics around the world,” he said.
And longer-term, the export of U.S. LNG could actually benefit other parts of the world, especially those nations like Ukraine, which rely on a volatile relationship with Russia to obtain LNG.
“That does create a major problem in the current political environment between Russia and so many countries, not just the U.S. but others, too. There’s a fear, I think, a realistic fear that natural gas prices could be part of that ongoing struggle. The price could be hiked during this coming winter and subsequent winters,” Dewhurst said, adding that, “To have a reliable source from the U.S. would be tremendous, but—and it’s a big ‘but’ here—it’s going to take several years for LNG exports from the U.S. to really have any impact for Europe.”
What’s more, Asia’s growing demand for difference sources of electric power may present business opportunities for the U.S. LNG exports.
“After the Fukushima disaster, understandably, Japan has taken a hard look at nuclear power as its main source of electric power and they’re looking much more strongly at natural gas and LNG in particular. China is very anxious to move away from coal-powered electricity production because of their problems with smog and the environment generally,” Dewhurst said. “There’s a huge increase in demand from Asia that will continue, and I think that will continue to drive the importance of LNG globally.”
The Department of Energy has been criticized for the snail’s pace at which it’s granted permit approvals to export LNG, and it’s also got another specter looming: whether to export crude oil, too.
In the 1970s when the ban was put into place, OPEC had curtailed its production and shipments of oil to the U.S., Dewhurst said. But that was 50 years ago, when oil seemed to be growing scarce and experts feared the U.S. natural gas supply would run out. Revisiting the nation’s energy policy, given the new era defined by vast hydrocarbon reserves, would make sense.
“I think the two are related,” Dewhurst said. “We need much more political vision to really start over on an energy policy and when that breakthrough comes, whether it’s first on LNG or first on crude oil exports, the two will very much go hand-in-hand.”
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