Redefining & Realignment In Global Natural Gas Sector

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The U.S. natural gas revolution is redefining the global natural gas sector. Whether you agree with where or how the natural gas is being extracted, gas is coming out of the ground at a record pace in the U.S. today. This means cheap natural gas is here to stay, at least for a few years, and it can be anticipated that the cheap gas era will have a number of significant social and economic impacts. The current issue of Citi Research’s “The Weekly Globalser” elaborates on the theme of “The New American (Gas) Century.”

Structural economic ramifications

Citi Research analysts Bruce Rolph and Tatiana Voytekhovich argue that cheap natural gas means increasing demand for the inexpensive energy source from a variety of sectors. “Mushrooming US gas demand in 5 sectors–global LNG exports, pipeline exports to Mexico/Canada, industrials, transportation and residential/commercial heating–could rise by 33% from 2013 to 2020 and should be the price mover.”

The transportation sector is clearly evolving in response to plentiful and cheap natural gas. Citi projects natural gas will enjoy a 25% market share in the heavy-duty trucking sector by 2020, for example.

Increasing demand will lead to price stabilization

The report extends the argument to say that this increased demand will eventually lead to gas price increases. “Long term US natural gas prices look likely to settle in the mid-$5/MMBtu range, above marginal production costs of most shale gas plays and ~20 to 25% above current forwards out to 2020, as demand surges between now and then. At this price, the US should still be a competitive LNG and pipeline gas exporter, joining the ranks of the major gas suppliers globally.”

New global natural gas order

Rolph and Voytekhovich also highlight how cheap U.S. natural gas is going to redefine the global natural gas sector. “US LNG exports are expected to redefine pricing and structure in the global LNG markets. Global LNG prices would likely fall and major gas producers that rely on high global prices could lose bargaining power. The breaking of decades-old oligopolies should boost supply and lower prices further.”

$5/MMBtu sweet spot for natural gas prices

The analysts also say that a gradual increase in the price of natural gas is not likely to create any major economic ripples and will actually benefit several sectors, especially given oil at above $90 a barrel. “Utilities could benefit as higher gas prices push up power prices, widening profit margins. Industrials should remain very competitive as prices around $5 would still be much below long term prices in Europe and Asia, and below the $15 gas-equivalent price of oil at $90/bbl.”

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