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  • Roger S. Conrad

US Natural-Gas Prices: Lower for Longer, with an Elevated Risk of Near-Term Downside

By Elliott H. Gue on Oct. 31, 2015

nternational Release Valves

International exports, either via pipeline to Mexico or in the form of liquefied natural gas (LNG), represent potential release valves for growing US natural-gas production.

Mexico’s gas output has hovered around 5.7 billion cubic feet per day since 2009, while consumption climbed to about 8.3 billion cubic feet per day in 2014.

With the country’s major oil and gas fields aging and in decline, the government had expected to rely on LNG imports to meet demand and had built three regasification facilities to accommodate this trade: Altamira on the east coast (2006) and Ensenada (2008) and Manzanillo (2012) on the west coast.

The shale gas revolution north of the border has prompted Mexico to pursue less expensive pipeline imports. Today, the country’s regasification terminals operate at a fraction of their nameplate capacity, replaced by US pipeline imports that peaked at 3.3 billion cubic feet per day in July 2015.

Mexican Imports

Mexico’s state-owned power company also plans to more than double its generation capacity over the next 14 years, with gas-fired power plants accounting for the bulk of these capacity additions.

Growing exports to Mexico will provide a demand outlet for US natural gas, though the volume of cross-border shipments probably won’t have a meaningful effect on pricing–America produces about 75 billion cubic feet of gas per day.

This trade also depends on the construction of additional pipeline capacity, which means that US natural-gas exports to Mexico will grow in a lumpy fashion.

Meanwhile, the Energy Information Administration’s most recent forecast calls for US LNG exports to reach roughly 9 billion cubic feet per day by 2030.

Although Cheniere Energy Partners LP’s (NYSE: CQP) LNG terminal is expected to come onstream later this year or in early 2016, export volumes will remain modest through at least 2018 and likely account for less than 4 percent of US production.

The economics of US LNG exports have also deteriorated significantly over the past year.

In the UK, the average future price at the National Balancing Point for the next 12 months stands at $5.87 per million British thermal units, a premium of about $3.40 per million British thermal units to Henry Hub prices. But the cost of liquefying and shipping natural gas from the Gulf Coast to the UK ranges from $2.75 to $3 per million British thermal units—and that doesn’t include regasification and distribution costs in the UK.

LNG prices have also tumbled precipitously in Asia and could come under additional pressure as liquefaction capacity comes onstream in Australia, Japan restarts some of its nuclear power plants and incumbent suppliers such as Qatar focus on retaining market share instead of pushing prices.

In short, LNG exports will provide a bit of relief but shouldn’t be regarded as a panacea for the oversupplied US natural-gas market.

Bottom Line: US Natural-Gas Prices Remain Lower for Longer

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    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor