Natural gas bears still bemoan the cold as it appears that gas prices have to continue to soar because winter refuses to go quietly. The market continues to rise to make sure we refill storage. Yet far beyond the short term influence of weather there is something much more going on in this market. For most of this year we have talked about that historic shift from a market that is oversupplied to where demand expectations will soon start to exceed the expected growth in supply. One part of that scenario is the possibility that the U.S. will start embracing natural gas exports.
The pressure is mounting on the U.S. to share its natural gas abundance with the rest of the world. Countries like Japan are desperate to secure supply. Not only did Japanese Prime Minister Shinzo Abe appeal to President Obama to allow exports, he is now in Russia trying to cut a deal with Vladimir Putin to erase the high price that the Japanese have had to pay. Quartz news says that Japan is the world's biggest importer of natural gas, and its needs have only grown since the nuclear crisis at Fukushima led to the shutdown of 48 of the nation's 50 commercial nuclear reactors. Even if those plants come back online they are under pressure to look for other alternatives.
President Obama's choice for energy secretary is pro-natural gas exports. Yet the AP reports that "Republican Sen. Lindsey Graham of South Carolina is blocking a Senate vote on President Barack Obama's energy secretary nominee to protest proposed budget cuts to a nuclear processing facility in Graham's home state. The Senate was expected to vote as soon as this week on physics professor Ernest Moniz's nomination to lead the Energy Department. The Senate Energy Committee endorsed Moniz in a 21-1 vote last week. South Carolina Republican Sen. Tim Scott cast the only dissenting vote. Like Graham, Scott opposes Obama's plan to cut about $200 million from a project to turn weapons-grade plutonium into nuclear reactor fuel. The plant is being built at the Savannah River nuclear site. A spokesman confirmed that Graham has placed a "hold" on the nominee and plans to meet with Moniz.”
Yet when it comes to gas exports, they are on the same page. One of the factors that has hurt the export debate was the fear that the Environmental Protection Agency (EPA) would declare fracking and natural gas as harmful to the environment. Yet what could be a fracking debate game changer the EPA dramatically reduced its estimates of greenhouse gas emissions from natural gas production. The EPA says that while methane is a potent greenhouse gas it is much cleaner burning than coal. The EPA is saying that tighter pollution controls instituted by the industry resulted in an average annual decrease of 41.6 million metric tons of methane emissions from 1990 through 2010, or more than 850 million metric tons overall. That's about a 20% reduction from previous estimates. The EPA revisions came even though natural gas production has grown by nearly 40% since 1990.
In other words natural gas use has been one of the biggest factors in reducing greenhouse gas emissions. So if the EPA really wants to save the world, it would behoove them to hurry up and approve U.S. exports so we can reduce other countries reliance on coal so they too can reduce their greenhouse gasses. It seems like we are setting the stage for natural gas exports.
The long term bullish case for natural gas gets stronger. Christine Buurma of Bloomberg writes "For AT&T Inc., the decision to introduce natural gas vehicles to the company's fleet in 2008 proved well-timed, as the price gap between gas and diesel soared to an all-time high that summer. The largest U.S. phone carrier began discussing a move away from higher-priced gasoline and diesel cars and vans the year before hurricanes Ike and Gustav disrupted energy output from the Gulf of Mexico. Now AT&T has 5,200 natural gas vans on the road, or about 7% of its fleet, as part of a plan to spend $350 million to replace about 8,000 gasoline-powered service vehicles over five years.
Fleet-owners from Ryder System Inc. to United Parcel Service Inc. are also switching as natural gas proves cheaper and cleaner. Gas prices have plunged 70% from a 2008 high, and are now at a 95 cent-a-gallon discount to diesel as advances in drilling technology have triggered a boom in production of the fuel from shale formations. Natural gas emits about 27% less carbon dioxide than diesel, Energy Information Administration data show.
"The economics are in favor of natural gas,” billionaire T. Boone Pickens said in a Dec. 19 phone interview. "During the oil crisis in the 1970s, it took only about five or six years for the U.S. truck fleet to switch from gasoline to diesel. It's going to happen that way for natural gas.” Pickens's Clean Energy Fuels Corp has 400 stations, up from 80 in 2003. Demand for natural gas from vehicles has doubled since 2005, according to NGVAmerica, an industry group in Washington.
There were 121,650 gas vehicles on the road in 2011, up from 117,074 in 2008, less than 1% of total registered vehicles, data from the EIA and the Bureau of Transportation Statistics show. About 23,000 natural gas vehicles may be sold in the U.S. in 2013, according to David Hurst, an analyst at Navigant Research in Troy, Michigan. That's a 19% increase over the 2011 total, the most recent year for which data is available from the EIA, the U.S. Energy Department's statistical arm.
Compressed natural gas averaged $2.94 a diesel-gallon equivalent at U.S. fueling stations in the week of April 22, according to Clean Energy Fuels. Diesel was $3.89 a gallon. The price gap has more than doubled from 45 cents a gallon in September 2005. Natural gas futures reached a record $15.78 per million Btu on the New York Mercantile Exchange that year after hurricanes Katrina and Rita curtailed supplies from the Gulf of Mexico.
Gas consumption in the transportation industry was about 400 million gallons of gasoline equivalent last year, double the 200 million in 2005, NGVAmerica data show. Gasoline demand was 134 billion gallons, according to the EIA. Fleet owners might save $25,000 a year on fuel costs, according to David Pursell, a managing director at adviser Tudor, Pickering, Holt & Co. in Houston. It would take more than two years to offset the higher initial cost of the vehicle. A fleet owner paying $65,000 more for a long-haul truck engine fueled by liquefied natural gas may see a 22% rate of return over the life of the vehicle, Pursell said.
Widespread adoption of so-called NGVs would increase U.S. gas consumption. If 10% of U.S. vehicles used the fuel instead of gasoline or diesel, natural gas use would climb by 6 billion cubic feet a day, or 8.5% of current demand, according to Tudor, Pickering. "That is huge,” Pursell said. "I think it's going to happen, but the big question is the timing.”
Growing use of natural gas vehicles may cut global gasoline and diesel demand by 1.5 million to 4.5 million barrels a day, Martijn Rats, an analyst at Morgan Stanley in London, said in a note to clients dated April 16. U.S.-marketed gas output may climb 0.3% this year to an all-time high of 69.3 billion cubic feet a day amid rising shale supplies, Energy Department data show. Production grew 34% from 2005 to 2012. The drilling boom allowed America to meet 84% of its energy needs last year, the highest level of self-sufficiency since 1991.
Crude and heating oil on the Nymex have more than doubled from crude's 2008 low amid a U.S. economic recovery, rising demand from China and concern that Mideast violence may curtail supplies. Heating oil prices are used as a proxy for diesel.
"‘With compelling economics for many vehicle owners and a large number of industry initiatives in place to stimulate take-up of natural gas, we foresee further growth in the global NGV fleet, despite some of the obstacles,’ Rats said” A must read in Bloomberg!
The Oil market looks to the Fed. The driving force behind the market right now is economic policy! To print or not to print? That is the question. With inflation tame bordering on disinflation the odds are raising that the presses both in Europe and the United States will continue to roll. Eurozone unemployment hit another record high hitting 12.1%. Inflation slowed to 1.2% to 1.7%. The ECB has no reason to not lower rates.
The Fed has to be careful as well because economic data is not all it is cracked up to be and instead of trying to signal an exit strategy they may want to think of another growth strategy. Getting scary!
The FT reports that “U.S. crude oil exports are flowing at the fastest rate in more than a decade in the latest sign of how the shale revolution is redrawing the world energy map. Foreign-bound shipments of U.S. crude totalled 124,000 barrels per day in February, matching levels last reached in 2000, the U.S. Department of Energy revealed in monthly data. All the exports went to Canada, the only destination where approval for exports is almost automatic under U.S. law.” A must read.