Markets

Silver Lining For Natural Gas As EIA Forecasts Price Hike

By Irina Slav

While natural gas producers in the U.S. have been suffering a price slump no less considerable than the oil price decline over the last couple years, they may now have cause for celebration as investors will be eyeing the Energy Information Administration’s (EIA) latest Short-Term Energy Outlook, which forecasts a rise in gas prices alongside consumption over this year and next.

Prices fell from around $4.70 per million British thermal units (MMBtu) in June 2014 to $1.93 in December 2015, the lowest since March 1999, the Agency said. Yet this seems to be about to change with the industrial use of natural gas growing faster than production. The EIA expects average gas prices of $2.65 per MMBtu this year, rising to $3.22 per MMBtu in 2017.

Industrial use is not the only factor pushing up prices. Overall consumption has also been consistently up as of late in all end users except power generation plants. Residential use should continue to grow over the next two years, adding further to the optimism.

On the flip side, the amount of natural gas used as fuel by utilities is on the decline—a trend that is set to continue over the next two years as well. Last year the share of gas in overall power generation was 33 percent, which EIA sees declining to 31 percent in two years. Part of the reason for the decline will be the higher prices; the other part will be competition from renewable energy sources.

Still, utilities are likely to continue to account for the largest chunk of natural gas consumption in the country in the short term.

The good news for gas, however, is very bad news for coal.

By the end of 2015, natural gas had firmly replaced coal as the number-one fuel used in power plants.

In November, coal accounted for just 29 percent of power generation in the United States, which is the lowest ever, EIA analyst Glenn McGrath told Climate Central.

The EIA outlook seems very optimistic for gas, but some analysts remain skeptical, fearing that weather could put a crimp in the forecasts. The current supply of natural gas is ample, they suggest, with small demand due to the mild winter, despite the recent cold spell. Inventories have fallen, but not enough to warrant a consistent price rise.

Seasonal fluctuations in gas demand are typical. The rise of renewables, however, may well prove to be a much more serious challenge for gas producers.

After the approval of the Clean Power Plan, the share of renewables in power generation will increase—slowly perhaps, but steadily. This is likely to undermine the position of natural gas as a leading power generation fuel in the long run, much more so than mild winters and cool summers.

This article was originally published on Oilprice.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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