The revival in US natural gas supplies is part of a trend that is likely to have numerous and profound consequences. If current trends continue, the growth in oil and natural gas supplies in the next decades could turn the US into a top energy exporter, rivaling some members of the Organization of the Petroleum Exporting Countries (OPEC).
US production up, prices down
There has been a huge increase in energy reserves in more politically stable areas. The increased production of natural gas in the US has already had a dramatic impact, reducing its price to below $2.
The US natural gas price is down 38% in 2012 alone and around 81% lower than the peak in June 2008. This allows energy intensive industries to regain a competitive position as well as create growth and jobs. It allows power suppliers to use clean energy, reducing the environmental impact and household bills.
Expect to see more and more news, including the export of natural gas from the US to the much more expensive Japanese and European markets.
Falling natural gas prices
Source: Blomberg; 1 May, 2012
What costs $2 per million British Thermal Units (mmBTU) in the US, costs as much as $11 per mmBTU in Europe. The lack of US export infrastructure to date has been a barrier to capturing this pricing arbitrage – record levels of storage are fairly impotent if you cannot distribute them. But this is changing. Asian and European utilities are eager to buy US supplies that are about 90% cheaper than gas from traditional producers.
The crisis at a Japanese nuclear plant in March 2011, the blowout of a BP oil well in the Gulf of Mexico and the recent push to clean up coal plants by the US environmental protection agency, have all contributed to the pressure to seek out new clean sources of energy. With natural gas emitting about half as much carbon dioxide as coal, utilities have been increasingly switching to natural gas. New technology means that more gas and oil can be released than previously thought possible.
More worryingly, we may witness a structural shift away from US political and military assistance to the Middle East. Its desire for energy independence is in sight and this could potentially and dramatically alter US foreign policy, and consequently reduce the defence budget. This poses important questions around the future stability of the Middle East.
Natural access
While the gas and oil companies directly involved seem the most obvious way for investors to access the theme, it may be that the suppliers of the ‘picks and shovels’ are equally rewarding, some of which are listed in the UK.
It is not inconceivable that some companies will be takeover targets as the oil majors seek to increase their exposure to the sector. The outlook is not without its complexity and there will be losers, especially those whose profits link to rig rates (the total rig count has been moving lower since 2009 as companies have discovered methods to extract more gas with less equipment, therefore pressuring rates).
Two US listed ETF’s are direct plays. First Trust Energy Infrastructure has a mixture of partnerships and individual stocks that are primarily involved with transport, storage, pipelines and energy utilities.
First Trust ISE-Revere Natural Gas invests in an equally weighted portfolio of about 30 US stocks that derive revenue from exploration and production of natural gas.
The promise of abundant and cheaper fuel should not be underestimated. Cheaper energy supplies materially affect large swathes of the US domestic manufacturing, transportation and energy industries. Citigroup estimates that as many as 3.6 million new jobs might be created by 2020 thanks to the US energy boom.
The effect on the US is likely to be profound; the US current trade deficit might fall by 60% by the end of the decade and the dollar could appreciate as imports shrink. Ultimately, this creates a huge opportunity for the US economy, the potential for a shift in the country’s foreign policy and rewarding ideas for us as global investors.
