PRICE OUTLOOK FOR NATURAL GAS

January 25, 2015


The references for this post are derived from the publication NGV America (Natural Gas Vehicles), “Oil Price Volatility and the Continuing Case for Natural Gas as a Transportation Fuel”; 400 North Capitol St. NW, ۰ Washington, D.C. 20001 ۰ phone (202) 824-7360 ۰ fax (202) 824-9160 ۰http://www.ngvamerica.org.

If you have read my posts you realize that I am a staunch supporter of alternate fuels for transportation, specifically the use of LNG (liquefied natural gas) and CNG (compressed natural gas).  We all know that oil is a non-renewable resource—a precious resource and one that should be conserved if at all possible.  With that said, there has been a significant drop in gasoline prices over the past few weeks which may lull us into thinking the need to continue seeking conservations measures relative to oil-based fuels is no longer necessary.  Let’s take a look at several facts, and then we will strive to draw conclusions.

The chart below will indicate the ebb and flow of crude oil vs. natural gas in BTU equivalence.  Please remember that BTU is British Thermal Unit.  A BTU is the measure of the energy required to raise one pound of water one degree Fahrenheit.  As you can see, the price of natural gas per barrel, energy equivalent, has remained fairly stable since 2008 relative to the price of crude per barrel.  Natural gas, either LNG or CNG is considerably more “affordable” than crude oil.

Crude Oil vs Natural Gas

There are several reasons for the price of oil per barrel dropping over the past few months.  These are as follows:

  • World supply is currently outpacing world demand. Supply has reached historic levels.
  • Significant increase in US production due to hydraulic fracturing or fracking.
  • There is to some degree, economic stagnation in Western Europe thereby lessening the demand for crude and crude oil products.
  • The economy in China, India and other countries is slowing.
  • Geopolitical factors tend to affect crude oil inventories.

Over the longterm, oil demand is likely to increase as economic growth returns to more normal levels and economic activity picks up. As has been the case in recent years, the developing countries led by China and India will likely lead the way in driving oil demand. The developed countries, including the U.S., are not expected to experience much growth in overall levels of petroleum use.

According to the International Energy Agency (IEA) and the U.S. Energy Information Administration (EIA), oil markets may turn the corner sometime in late 2015, as that is when these agencies are predicting that oil demand and supply will cross back over. These agencies also are forecasting 2015 prices in the mid- to high-$50 per barrel range. The most recent Short-Term Outlook from EIA (January 2015 SEO) pegs the price of Brent oil at an average of $58 a barrel in 2015. That level reflects averages as low as $49 a barrel and a high of $67 a barrel in the latter part of the year. The WTI price of oil is expected to average $3 less than Brent for a 2015 average of $55 a barrel. For 2016, EIA’s January SEO forecasts average prices of $75 per barrel for Brent oil and $71 for WTI oil.

Another important issue is the current number of U.S. refineries.  In the U.S., virtually no new refineries have been built for several years and the number of operable refineries has dropped from 150 to 142 between 2009 and 2014.  One question—will diesel prices continue to fall?  Will the transportation sector of our economy continue to benefit from lower prices?   We must remember also that refineries have several potential markets for diesel fuel other than transportation uses, since it can be used for home heating, industrial purposes and as boiler fuel. The lead up to winter has increased home heating fuel demand, particularly in the northeast, which has likely also contributed to a slower decline in diesel prices.

What is the long-term projection for transportation-grade fuels?  The graphic below will indicate the use of natural gas will continue being the lowest cost fuel relative to gasoline and diesel grade petroleum.

Projected Price Differentials

This is also supported by the following chart.  As you can see, natural gas prices have remained steady over the past few years.

Average Retail Fuel Prices in USA

Another key factor in assessing the long-term stability of transportation fuel prices is the cost of the commodity as a portion of its price at the pump. Market volatility and commodity price increases have a much larger impact on the economics of gasoline and diesel fuel prices than they do for natural gas. As shown below, as much as 70 percent of the cost of gasoline and 60 percent of diesel fuel is directly attributable to the commodity cost of oil, while only 20 percent of the cost of CNG is part of the commodity cost of natural gas. This is a key in understanding the volatile price swings of petroleum-based fuels compared to the stability of natural gas.

Price at the Pump

Proven, abundant and growing domestic reserves of natural gas are another influence on the long-term stability of natural gas prices. The recent estimates provided by the independent and non-partisan Colorado School of Mines’ Potential Gas Committee have included substantial increases to domestic reserves. The U.S. is now the number one producer of natural gas in the world.

Even with today’s lower oil prices, natural gas as a commodity is one-third (3:1) the cost of oil per million Btu of energy supplied. More recently, the price of oil has exceeded natural gas by a factor of 4:1 and as much as 8:1 when oil was $140 a barrel and natural gas was trading at $3 per million Btu. Perhaps most relevant is that the fluctuations in these comparisons have been almost totally based on the volatility of oil prices. As the earlier tables clearly demonstrate, natural gas pricing has been relatively consistent and stable and is projected to be for decades to come.

As you can see from the following chart, the abundance of natural gas is definitely THE key factor relative to insuring the continuation of crude resources for generations to come.

US Natural Gas Future Supplies

Conclusion

  • History shows that the recent decline in world crude oil prices and related gasoline and diesel prices are likely to be short-lived. Oil prices will increase as the world economy rebounds.
  • Diesel fuel is influenced by a variety of other factors that will likely keep upward pressure on prices over the long run.
  • On a Btu basis, natural gas still has a 3:1 price advantage over oil. At the pump, average CNG prices are currently $0.75 to $1 lower than diesel.
  • The long-term stability and low prices for natural gas relative to oil are likely to remain for many years – perhaps even decades – based on well-documented economic models.
  • The long-term nature of fleet asset management suggests that it is prudent to continue to invest in transportation fuel portfolio diversification by transitioning more vehicles to natural gas. Fleets that have already made the investment in vehicles and infrastructure will continue to benefit from the stability of natural gas prices and their continuing economic advantage.
  • State and federal policymakers are likely to continue to promote fuel diversity and policies that encourage use of natural gas as a transportation fuel on the road to energy security.

As always, I welcome your comments.

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