Natural gas may spell end of era for oil

The Power of the Markets

 It is absolutely amazing the way the energy world has been transformed in recent years — so much so that many are calling for the End of An Era for oil. The latest call for this end is Citi's Seth Kleinman, who wrote that  "The End Is Nigh," in which he argues crude oil demand — and with it, prices —is set to fall dramatically in the coming decade due to natural gas.  He writes that the combination of an accelerating push to substitute natural gas for oil and ongoing improvements in fuel economy are enough to mean that oil demand growth may be topping out much sooner than the market expects. The shift from oil to gas is already underway in the U.S., where the shale gas revolution is giving a large economic incentive to make the switch. As the U.S. shift gains pace, politics, greater natural gas availability and environmental concerns are facilitating the trend into the global market, more than compensating for the narrower gas-oil spread.  

 I am in agreement and loyal readers of the "The Energy Report” know that we have been saying the same thing for some time and are on record for a price of $7.00 by 2015. We have been documenting how the biggest users of oil and coal are already making the switch to cheaper and cleaner natural gas. Burlington Northern, Fed X, ATT. We spoke about the Bloomberg News report power producers including Duke Energy Corp., NRG Energy Corp., Southern Co. and Dynegy Inc. say they plan to run their gas-fired units this year at close to the top rates of 2012. Factories are fueling a U.S. industrial boom because they can lock in low prices for natural gas. Let's face it, the natural gas era has begun and you can't get out of its way.

You see throughout history the drive of man to make profits has inspired him to do what they said was impossible and it is happening in the energy space. High prices, insatiable demand and tight supplies forced us to find an alternative. That alternative is natural gas.  Of course in energy this is not the first time that this has happened, we have seen it time and time again over that last 170 years or so. From the time the world was worried that the lights would go out because of shortages of whale oil for lights when it was replaced with kerosene.  We saw our fuel efficiency improve and demand drop after the Arab oil embargo. We are seeing it again with the miracle of fracking.

We have spoken how the U.S. could actually achieve energy independence, and recently we have been banging the drums talking about a major bottom in natural gas. Nat gas closed above $4.00 for the first since March 14, 2011.

One headwind for natural gas may be nuclear power. Bloomberg News reported that "Nuclear power plants in the U.S. are poised to operate at the highest rates for any second quarter in 17 years as fewer reactors are scheduled to shut during the traditional maintenance season, squeezing demand for natural gas. Generation during the quarter will average about 8% more than a year earlier, according to data compiled by Bloomberg. Above-normal nuclear production will displace about 850 million cubic feet a day of gas demand, or 3.2%, compared with the same period in 2012, according to Barclays Plc. The maintenance comes as a 17% rally in gas this year threatens to divert what demand growth there is to coal, which has dropped 3.9% since December.  Operators of the nation's 104 nuclear plants typically shut reactors for maintenance as heating demand ebbs and before air-conditioner use picks up. Reduced maintenance this year, with seven plants in the Southeast scheduled to shut compared with 13 last year, means opportunities for gas and coal are limited. The other one is today's Energy Information Administration report.

In another example of how the world is changing is the building of a new refinery. Remember a few years ago when we said that we could not build a new refinery in this country. Remember the talk that a refinery was not built in this country for 20 years etc. Well the Energy Information Administration is reporting that we are  going to start building not one but 2. The EIA says "one of two new refineries being built in North Dakota broke ground this week. The 20,000-barrel-per-day (bbl/d) Dakota Prairie facility is scheduled to be built in 20 months. The impetus for the state's second and third refineries is the rapid increase in demand for diesel fuel and kerosene for trucking and industrial use within the state. Much of the increase in demand has been fueled by the boom in crude oil production from the new wells in the Bakken Formation in North Dakota's northwest corner. The demand for these middle distillates rose 80% in North Dakota from 2009 to 2012, providing the incentive to invest in local refineries.”

The Cyprus stock market is not opening and it seems we have an uneasy calm!

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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