By Joe Petrowski

Among the factors that pulled down oil prices were not just the great recession, U.S. production and the Saudi Iran market share tussle but the immense stock piles and production of U.S. gas from fracking.

At our peak we were producing almost 100 billion cubic feet per day of natural gas and our stocks grew to 5.7 trillion cubic feet (equivalent to 1 billion barrels of oil).

As to price, natural gas is quoted in dollars per million cubic feet. Oil in barrels, of course, but there are approximately 6 million Btu’s per barrel (5.6 for the MIT grads), so with natural gas’ incremental cost of production of $4 or less it’s not surprising a $24/barrel commodity pulled down a $100/ barrel commodity.  While the proper ratio between natural gas and crude is as highly debated as gold is to silver, the supply and price plunge of natural gas contributed to crude’s collapse.

While Btu and energy content is the most important variable it is not the only driver to relative valuation. Natural gas enjoys an environmental advantage, while crude and refined products own a storage and transport advantage. But that is about to change with dramatic consequences for both the petroleum and natural gas markets.

Natural gas is beginning to fight for the transport market already significant in Class 6 to 8 heavy duty trucks, and soon in light duty vehicles and ultimately in residential and small commercial vehicles.  While current demand is approximately 1 Bcf/D, the market by 2020 could easily grow to between 5 Bcf/D and 10 Bcf/D.

Combine that with the second new natural gas market—exports–and we can see a significant turnaround in natural gas prices, equity and asset values. Mexico is already taking 5 bcf per day by pipe and we could see that double by 2020.  While LNG export facilities and the pipes that feed them are being delayed by the usual mix of environmentalistas, methaniacs and petrophobes there are export registrations on file for as much as 20 Bcf/D by 2020. And these facilities will get built, not only increasing U.S. power and influence but eliminating our trade imbalance.

Electric generation from natural gas will grow from 13 Bcf/D currently to 20 Bcf/D as new power plants and the pipes that feed them are finally built. The risk of brownouts, blackouts, and 25 cent/kwh power will even bring the most committed environmentalista to tears.

While U.S. natural gas production at 73 Bcf/D is robust, the current rig count of 464 (half of a year ago) will cause production to fall to the high 60s Bcf/D by the fourth quarter of this year. Residential demand of 13 Bcf/D was low because of a warm winter, but should pick up as new home building strengthens, conversions from petroleum continue and local distribution systems are upgraded.  So we should start to see demand outstrip supply by as much as 10 Bcf/D making the 5.7 Tcf safe stock number of Nov. 1, 2015, approach 5.0Tcf by Nov 1, 2016. While not alarming this should keep natural gas certainly from collapsing in price and closer to $4/MMBtu than $2/MMBtu.

Good for energy prices, Good for the United States and good for equity valuations.

My first mentor once said “The race does not always go to the fleet or the battle to the strong. But that is always how you bet.” Bet on natural gas, energy and the United States.

 

JHP photo-537Joe Petrowski has had a long career in international commodity trading, energy and retail management and public policy development. In 2005, he was named President and CEO of Gulf Oil LP and elected to the Gulf Oil LP Board of Directors. In October of 2008 he was named CEO of the now combined Gulf Oil and Cumberland Farms whose annual revenues exceed $11 billion and that now operates in 27 states. In September 2013, Petrowski stepped down as CEO of The Cumberland Gulf Group. He is now managing director of Mercantor Partners, a private equity firm investing in convenience and energy distribution and Chairman of the Gulf board.