Natural gas making case for higher prices longer-term

Benchmark Wars have taken on a whole new meaning. Reuter’s News reports that, “Royal Dutch Shell upended the oil world on Friday, unilaterally rewriting the rules of the market that sets the basis of billions of dollars of oil worldwide, risking a liquidity-sapping confrontation with other actors."

In a notice published on its website, Shell said it would alter its SUKO 90 terms in the so-called Dated Brent market starting on Monday for cargoes loading in May and thereafter in a move the oil major said would bolster liquidity in the key North Sea market. The SUKO 90 terms are the standard terms for the Dated Brent market, a complex interlocking market for over-the-counter forward oil sales contracts and physical oil cargoes in the North Sea that underlies Brent crude futures.

“The split between Shell and Platts comes as a steady decline in North Sea oil output and unplanned oilfield outages have raised questions about Brent's credibility as a global benchmark. These small, local supply losses can boost world prices.”

"The new robust and transparent Quality Premium mechanism will support the Brent benchmark by allowing for more crude grades and cargoes to be used in establishing the underlying market price," Shell said in an emailed statement. "It will therefore contribute toward higher liquidity and better price discovery."

As I have written before, the days of Brent as a global benchmark are numbered. As time goes on it is clear that as the infrastructure in the U.S. catches up to the massive surge in oil production, once again Oklahoma will be benchmark to the world. That market will reflect the price of oil in a place that will be the world’s largest producer and largest consumer as well as a major exporter. What better way to get a handle on the global oil market.

Heating oil rocked as the East Coast got buried under super snow blow Nemo. Yet one wonders how long that will hold with New York temperatures heading back into the 40s and the fact that all of those diesel sucking jets were grounded. Get ready for the big melt down.

The WTI is still topping with a head and shoulders on the daily chart. Brent crude is still strong on strong data out of China North sea production problems as well as a feared increase in geopolitical risk. We also are seeing concern that supplies will start to once again build up in Cushing, Oklahoma. That should lead to yet another build in crude oil supply of 3.2 million barrels. Refinery runs should fall as well by 1.0 million barrels. Gas should fall by 2 million barrels and distillate by 2 million as well.

Short term natural gas continues to bear the weight of rising supply but long term the market is looking more like a major long term bottom. Reuters reported that, "U.S. natural gas prices should jump 32% this year compared with 2012 as stronger industrial demand and a potential dip in production tighten fundamentals," a Reuters poll found. The latest quarterly poll showed analysts to be slightly less bullish than in November due to a relatively warm start to the winter heating season, but overall strong demand from utilities was seen keeping a floor under prices. The poll put the consensus forecast for the average spot price this year at Henry Hub, the benchmark U.S. supply point in Louisiana, at $3.66 per million British thermal units, up 32% from the $2.77 realized average in 2012 but down 3.2% from the previous poll in November. Of the 29 participants in the poll, there were 13 downward revisions, four upward revisions and seven unchanged. Five did not participate in the previous poll. Price estimates for 2013 ranged from a low of $3.25 to a high of $4.50. Gas demand was seen improving further in 2014 as stricter rules on emissions force more inefficient coal-fired plants to shut. That should help drive prices up another 16% to $4.24, according to the Reuters poll. Prices in 2015 were expected to gain another 9% to $4.63 as economic activity continues to ramp up and more utilities turn to cleaner-burning gas instead of coal to generate base load power.

Utility demand is the biggest surprise. Historically, coal has had the competitive edge over gas and has been the fuel of choice for power generation, previously capturing about 50% of the total. But gas has been steadily gaining market share in the electric power sector, grabbing an estimated 31% of total generation this year, up from 25% in 2011. Coal's share of power generation was expected to drop to 37% in 2012 from 42% last year. Analysts estimate that coal-to-gas switching reached a record high this spring, adding as much as 8 billion cubic feet per day, or 12%, to total gas demand compared with the same period last year. Some experts estimate it is still running 4 bcf per day or more above a year ago heading into the peak-demand winter season. While coal-to-gas switching was expected to taper off somewhat next year due to higher gas prices, analysts note that at least some of the gains in demand will be permanent.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

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