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What Wikipedia Can't Tell You About the Natural Gas Price Forecast

Chris Ward Feb 9, 2016 3:28:53 PM
Chris Ward
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Will LNG exports and globalization impact U.S. natural gas price forecast?

The answer to the above question is yes, so let’s look at exactly how that will happen.

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Natural Gas in the Beginning

Dating back to the 1960’s, natural gas prices were strongly influenced by long-term oil contracts. As the global market evolves and liquid natural gas (LNG) exports grow, many analysts say that oil will have less of an impact on how natural gas is priced.

 

An article posted in The Economist stated that “Analysts believe that, as a result, the pricing mechanism for natural gas is on the verge of change, and that a real global market will start to emerge, adding Asian trading hubs to those in America and Europe.” [1]The Economist also says that these changes should spur the spread of natural gas and that producers are prepared to stall if prices drop. The article also claims that long-term oil contracts have a place in the market because suppliers made large investments in LNG. [1]

 

The Evolving LNG Market

There’s been a dramatic increase in LNG exports between 2004 to 2014. The increase has led to a much more bearish outlook for gas compared to that of oil so it’s a buyer’s market. Australia should become the largest LNG producer in the years to come while the U.S. should become the 3rd largest. [1]

 

The LNG push, along with lower prices in Asia, have brought traded global natural gas prices even closer. According to Trevor Sikorski, a consultant at Energy Aspects, more homogeneous prices are an important step towards globalizing the market for LNG before the prices can become closer. [1] There are several key factors that we need to overcome:

  1. markets must become deeper so a mixture of LNG and piped gas will encourage better prices;
  2. derivative markets are necessary so that natural gas producers can use price swings to offset expenditures into new capacity; and
  3. markets need to be deregulated to promote competition over supply.

 

The Impact on U.S. Natural Gas Prices

According to Francisco Blanch, head of commodities research at Bank of America Corp, “Connecting U.S. natural gas prices, could result in wider spreads at home.” He goes on to say that the “futures for January 2017 are already trading at a 35.7 cent premium to that of January 2017 futures, which is the biggest spread since 2012.” [2]

 

In May of 2012 the New York Mercantile Exchange (NYMEX) settlement rate is that of where prices are trading currently, and by the end of 2012 the NYMEX settlement rate closed in the $3.35 range. Decreased production and a hot summer were the key influences why prices rebounded late in 2012. [3]

 

Will the rest of 2016 be a carbon copy of 2012?

Personally, I think natural gas prices will go up in 2016. The biggest drivers in price will be the U.S.’s LNG exports finally moving forward and an expected hotter summer this year. [4] We should focus on how much LNG exports impact our prices at home, and we all know that higher demand increases prices. Thus the question for the natural gas price forecast becomes, just how much will prices go up?

 

Sources:

[1] The Economist-Natural Gas “Step on it” January 30, 2016 from the print edition, 

http://www.economist.com/node/21689644/print

[2] Bloomberg “Gas Prices Will Be Affected by LNG Exports” July 30, 2015

[3] U.S. Energy Information Administration, http://www.eia.gov/

[4] NOAA, Climate Forecasts- Jul-Aug-Sep 2016 http://www.cpc.ncep.noaa.gov/products/predictions/long_range/seasonal.php?lead=6

 

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Topics: Natural Gas, natural gas price forecast