North American natural gas is set up to be the greatest energy investment of the decade.
Along with historically low prices in the United States and the looming exports of LNG are three other global factors that will eventually send natural gas prices (and stocks) to new heights.
1. India
After the recent election of Narendra Modi, the nation’s 1.23 billion people face dire power shortages.
And even though Modi’s administration claims to be pro business and industrial growth, there are lingering issues from previous years that have slumped the nation’s coal production and energy distribution.
The total demand for coal in India from March 2013 to March 2014 was 739.4 million metric tons, but India only produced 565 million metric tons in the same time.
Add to that the rampant coal theft that has plagued Indian coal mines to the tune of 60 million metric tons per year or 13% of production, and you can see that there is an opening for North American natural gas to fill the gap coal has left in India’s grid.
2. China
China has a population of 1.35 billion, and an unquenchable thirst for GDP growth.
However, the wide-scale consumption of coal in China has led to an outcry against smog pollution throughout China’s largest cities.
Shanghai, Beijing, Hangzhou and other major hubs have felt the pressure to reduce smog caused by coal plants, and earlier this month Beijing enacted a timetable for scaling down coal use by 2020.
Of course, we also can’t ignore the rumors that the Chinese government is mulling a national cap on coal as early as 2016.
Following a massive $400 billion deal with Russia, China’s transition from coal to natural gas creates the potential for inflated prices. That transition is clearly underway…
Right now, China consumes 45% of global coal production, and to switch that amount to natural gas means that natural gas prices will be driven to record highs everywhere including the United States.
Which is great news for investors in North American energy since the rising gas prices will help the stocks of shale gas drillers in the Marcellus, Utica, Eagle Ford, and other major formations that produce natural gas.
Finally, we can’t forget about one global catalyst for our transition to natural gas.
3. The rising price of oil.
You and I both know that crude prices have been rising steadily, but a new study out this week shows that production costs could be heading into risky territory. A study by the Carbon Tracker Initiative found that production from Canada’s oil sands – for example – need oil prices to to reach $150 for them to turn a profit.
In other words, we would see oil prices top the record levels we saw during the summer of 2008. And while that portent of $150 per barrel is arguable, I’m not entirely convinced we’ll see it happen in the near future.
What we will see, however, is the potential production slowdown in the oil sands area. There’s no question that these producers are battling some of the highest production costs in the world.
Yet, looking beyond those hurdles for operators in the oil sands, keep in mind that conventional oil reserves are dwindling, and the cost of deep-water and hydraulic fracturing has kept oil prices havering around $100 per barrel. Even after boosting U.S. oil production to near record levels, it’s imperative that people understand that this new supply is more expensive to extract.
Now throw in addition premiums to crude oil prices, such as the geopolitical mess right now in the Middle East and the Ukraine.
And although all of these factors will shape oil prices over time, it’s nearly impossible to say when the price of oil will become prohibitive to consumption (or even the day that China will implement a national cap on coal pollution).
What we do know is that by 2020, there will be no coal in Beijing, and that by the end of 2015 the U.S. will be exporting LNG around the world. Over the short term we’re going to see early investors building their natural gas positions before this bullish window of low prices closes.
Until next time,
Alex Martinelli
