Natural gas may be on the verge of a rally
By James Osborne | Houston Chronicle | January 25, 2016

WASHINGTON - After years of historically cheap natural gas in the United States, prices could soon be on the rise.

A forecast released Monday by the U.S. Energy Information Administration predicted natural gas prices will rise more than 60 percent over the next two years, averaging $2.65 per million British thermal units this year and $3.22 in 2017.

Oil and gas drillers across the United States have struggled under collapsing commodity prices, driven in part by a boom in domestic shale drilling that has transformed the industry.

Of late much of the attention has focused on oil, the price of which has fallen more than 70 percent since the summer of 2014. But natural gas, which was being tapped in shale fields through hydraulic fracturing years before crude, has been selling at a steep discount since 2009.

The U.S. gas surge could soon be tapering off. This year U.S. production is only expected to grow by 0.6 percent - compared with a 7 percent annual growth rate in 2015, the Energy Information Administration said.

And the government is expecting demand for gas to rise. Its analysts pointed to high consumption by the U.S. power sector, as it shifts away from coal and toward gas and renewables. At the same time, cheap natural gas had led to increased demand from the industrial sector, which uses the fuel to produce chemicals and fertilizer.

The agency's forecast served as an upbeat counterpoint to some more dire predictions.

There is some skepticism whether a demand spike for gas will materialize in the U.S. anytime soon. Research firm Raymond James, for instance, is predicting natural gas prices are likely to stay at current levels for the foreseeable future, averaging $2 per million British thermal units this year.

"Industrial demand has continually disappointed. In the power sector, gas is continually being challenged by solar," said Pavel Molchanov, an energy analyst with Raymond James. "The demand will materialize, but it's just going to take longer."

Right now the U.S. is enjoying some of the cheapest natural gas prices in recent history. Over the past decade, the Henry Hub benchmark has averaged $5.18 per million British thermal units, more than double what it is now.

The fall in oil and gas prices has led to a wave of bankruptcies and consolidation among drilling companies - likely to only worsen should natural gas prices remain low.
"I expect bankruptcies are up in 2016. I wouldn't give any specific names, but there's some companies on my list that are in particular trouble," said Mark Hanson, an equity analyst with research firm Morningstar.

But for industrial customers, who rely on natural gas for fuel and feedstocks for a range of products like plastics and chemicals, the price drop has spurred expansion, particularly along the Texas Gulf Coast.

A rise in natural gas prices could lead to a rise in the price of petrochemical products, slowing growth in an industry that has enjoyed a resurgence in recent years.
"In a dramatic reversal of fortune, the United States is now one of the most affordable countries for petrochemical production," Chet Thompson, president of the industry group American Fuel & Petrochemical Manufacturers, said in a speech last week.

The recent price shock comes during a shift in U.S. energy policy. The government has authorized the export of liquefied natural gas, with the first facility, Cheniere Energy's Sabine Pass terminal on the Louisiana Gulf Coast, expected to start operating this year.

Also, the flow of gas through pipelines connecting U.S. fields to Mexico is increasing rapidly. In October, more than 98 billion cubic feet of gas was exported to Mexico, a fourfold increase from the same period in 2010. At the same time, U.S. natural gas imports, which primarily come from Canada, are expected to continue what is now a years-long decline.

In its report Monday, Energy Information Administration predicted by the summer of 2017 the United States would be a net exporter of natural gas. That has not happened since 1955, the agency said.
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