NATURAL GAS AND COAL PRICE OUTLOOK In order to predict where natural gas prices might be headed, one has to look to a bit of history. The 2016 low in natural gas prices was thought to be below the cost of production for many producers. Evidence of this severe pricing was seen in the near-failure of one of the world’s largest natural gas companies, Chesapeake Energy. Many considered natural gas to be in a perpetual bear market in which supply would not tighten for several years. From 2013 to early 2016, the global natural gas, supply was so large that storage capacity was exceeded.
1) US Natural Gas Rigs In Operation - Weekly
1800 1600 1400 1200 1000 800 600 400 200 0
Source: Baker Huges - Most recent: 145 as of 01/27/2017
The pattern of declining energy prices, starting in 2005 clearly resulted in the U.S. natural gas rig operating count falling by 94% from 2008 to 2016. By late December 2016, US inventories had fallen below the five year average for the first time in 17 months. The U.S. has just started exporting liquid natural gas from the lower 48 states for the first time ever (via Cheniere Energy’s Sabine Pass) and that should help reduce the extensive oversupply within the US. It is not surprising that Asia has overtaken Europe as the world’s largest natural gas export destination.
If worldwide consumption increases owing to increased air pollution efforts, not to mention cyclical increases reflecting the global economic recovery, we don’t think it is aggressive to predict a doubling of prices in the next two years. Over the last eight years, prices ranged from $1.61 to $6.31 per million BTUs.
As for coal prices, they appear to have topped out at roughly the same time that the restrictions on the use of coal in China were implemented. As of this writing, coal prices from Australia, China and India had declined by 42% from the 2016 peak. While better economic activity should cushion prices, one can’t rule out a slide down to $150 per ton.
29 | ADMISI - The Ghost In The Machine | January/February 2017
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