Shale Gas – A Boon To The US

The shale gas industry has been a boon for the US’ energy infrastructure as the nation’s dependence on energy imports and its alternatives has drastically reduced over a period of time. Since natural gas is one of the energy sources used for generation of electricity in the nation, its use because of the cyclical nature of the commodity has increased in comparison to coal which is also used to generate electricity.

The monthly natural gas share of the total US’ electricity generation surpassed the coal share in July 2015 for the second time ever, with natural gas fuelling 35 per cent of the total electricity generation to coal’s 34.9 per cent share. Having understood the importance of natural gas as a commodity, it becomes imperative to understand the current market forces in effect and the price movers for the commodity in the winter period October-March which might see increased/decreased consumption depending on how the heating degree days in the US’ pan out.

Price Performance

In the period April-September 2015, NYMEX natural gas price has lost its value by around 4.5 per cent. The monthly average price at Henry Hub, a natural gas benchmark, declined from USD 4.14 per million Btu (Million British Thermal Units) in July 2014 to USD 2.91 per MMBtu in July 2015, and it has since fallen to USD 2.72 in September. On the contrary, MCX natural gas prices has lost its value marginally by around 0.2 per cent as rupee depreciated by around 5.2 per cent, cushioning the sharp fall in prices. Natural gas prices are a subset of a combination of factors ranging from production, consumption, trade, inventories, climate, and hence understanding all the factors is of supreme importance for further price trajectory.

The Forecast

According to Energy Information Administration’s forecast, the total natural gas consumption is set to average 76.2 billion cubic feet (Bcf) per day in 2015 and 76.4 Bcf per day in 2016, when compared to 73.1 Bcf per day in 2014. The production side also looks brighter with the EIA expecting marketed natural gas production to increase by 4.2 Bcf per day and 1.5 Bcf per day in 2015 and 2016 respectively. Despite relatively low natural gas prices, natural gas production is expected to grow because of drilling efficiency. This in turn will reduce the demand for natural gas imports from Canada and increase exports to Mexico.

Natural Gas Inventory

If we look at the period from April 3 (the beginning of the injection season) through September 25, the net storage injections totalled 2,077 Bcf, or 174 Bcf lower than the 2,251 Bcf injected during the same 26 weeks in 2014. During these weeks for the years 2010-14, net injections into storage averaged 1,735 Bcf. The net injections are higher when compared to the five-year average. The total natural gas working inventories as on September 25, 2015 totalled 3,538 Bcf, which is an increase of 15 per cent when compared to the same time in 2014. As per the projection by the EIA, the end-of-October 2015 inventories will total 3,956 Bcf, which would be 158 Bcf above the five-year average and the highest end-of-October level on record.

The Way Forward

Continuing high production growth and high injections will act as a negative factor as demand will be lower, which in turn reduces the power burn in the residential as well as commercial sectors, the two heavy users of natural gas. Also, EIA projects that the average US household expenditures for natural gas, heating oil, and propane during the upcoming winter heating season (October 1 through March 31) will be 10, 25, and 18 per cent lower respectively than last winter because of lower fuel prices and lower heating demand.

Heating degree days are a unit of measurement used to calculate how much energy is needed to heat a building. The colder it is the more heating degree days there are for a given period of time. According to the EIA estimates, the heating degree days for the year 2015 is estimated at 3,603 when compared to the 3,883 HDD in 2014-15 and lower than the 10-year average (2005-2015) HDD of 3,766 . This clearly indicates that the winter season will be warmer than normal which in turn will reduce the incremental demand for natural gas and lower prices.

Hence, we expect NYMEX natural gas prices (CMP: USD 2.5/MMbtu) to go lower towards USD 2 per MMbtu by the end of March 2016 while MCX natural gas prices (Rs 162/MMbtu) can head lower towards USD 120 per MMbtu mark in the same time frame.