Natural Gas Is a Sucker’s Bet: Stephen Schork
This sensational headline from Yahoo! Finance got me thinking about where the price of natural gas is headed and whether it will indeed eventually be used more in the future.
Natural Gas Is a Sucker’s Bet: Stephen Schork
Having seen him on CNBC a number of times, I think that Schork is a relatively smart, well-spoken individual. Having said that, this doesn't prevent him from being wrong. He was completely wrong a number of times during oil's historic run to $147/barrel.
I think that a phrase that I often say applies here, "The truth lies somewhere in the middle." I don't think that the massive bounce in natural gas prices that many of the bulls are looking for is going to materialize any time soon. The market is just different today than it was during the commodities surge to $13/MMBtu during 2008. Back then, the U.S. was much more reliant upon the Gulf of Mexico for its natural gas. Any hurricane that threatened to disrupt Gulf production sent the price of gas surging. Furthermore, the economy was humming along at a blistering pace several years ago spurring strong demand for the commodity.
Flash forward to today, the aftermath of the Great Recession, and the demand for natural gas is not nearly as robust. More importantly, new drilling technology, such as fracing, has opened up new sources for natural gas that didn't exist a few short years ago. Despite the current low price of natural gas, around 4.30/MMBtu, companies are still drilling for gas like crazy.
That is why natural gas prices are so low right now. I personally don't see anything that will dramatically cause this trend to change in the near future either. Anyone who thinks that the U.S. will in any significant way begin to use natural gas as a transportation fuel is absolutely dreaming. As someone who works in the auto industry, it would absolutely blow my mind if this were to happen. Yes, it is being used in a minimal way right now and it will continue to be used from time to time in the future, but in my opinion the use of plug-in electric vehicles is a much more likely transition than the use of natural gas. The Nissan Leaf and Chevrolet Volt, along with some Teslas and a few other odds and ends if you want to count them, are already being sold. If they are well received by the public, I expect the use of plug-in vehicles to continue to rise, slowly but steadily. It will take a while before this happens, but the possibility of plug-in vehicles having a meaningful impact upon electricity consumption some day is very real.
Plug-ins aren't where the real demand for natural gas is going to come from, so you'll have to excuse my tangent. The real demand for natural gas is going to come from its use in generating electricity. The combination of new EPA regulations and the fear of nuclear power in the aftermath of the tragic Japanese earthquakes make natural gas a logical source for new power plants. Just this morning I came across a list of coal power plants that companies are planning to take off-line in the near future. Take a look:
OWNER UNIT SIZE STATE DATE TO SHUT
Exelon Cromby Units 1,2 345 PA May 31, 2011
Exelon Eddystone Units 1,2 588 PA May 31, 2011
AEP Phillip Sporn 450 WV 2011
TVA Shawnee Unit 10 124 KY 2011
Duke Cliffside 1-4 198 NC 2011
Duke Buck 3 & 4 113 NC 2011
AES Greenidge 156 NY c2011
AES Westover 128 NY c2011
TVA Widows Creek 1-2 282 AL Late 2011
TVA John Sevier Unit 1,2 352 TN 2012
Duke Edwardsport 160 IN 2012
Duke Dan River 1-3 276 NC 2012
Progress H.F. Lee 397 NC 2013
Black Hills W.N. Clark 42 CO By 2013
Progress Weatherspoon 172 NC 2013-2017
Progress Sutton 600 NC 2014
Duke WS Lee 370 SC 2014
Dominion Salem Harbor 738 MA 2014
AEP Glen Lyn 335 VA Dec 31, 2014
AEP Kammer 630 WV Dec 31, 2014
AEP Kanawha River 400 WV Dec 31, 2014
AEP Phillip Sporn 600 WV Dec 31, 2014
AEP Picway Plant 100 OH Dec 31, 2014
AEP Big Sandy 1,2 1,078 KY Dec 31, 2014
AEP Clinch River 3 235 VA Dec 31, 2014
AEP Conesville 3 165 OH Dec 31, 2014
AEP Muskingum River 1-4 840 OH Dec 31, 2014
AEP Tanners Creek 1-3 495 IN Dec 31, 2014
AEP Welsh 2 528 TX Dec 31, 2014
Dominion North Branch 74 VA Late 2015
Duke Riverbend 4-7 454 NC 2015
Duke Buck 5-6 256 NC 2015
TVA Widows Creek 3-6 564 AL Late 2015
TVA Johnsonville 1-6 794 TN Late 2015
TVA Johnsonville 7-10 692 TN Late 2017
Dominion State Line 515 IN By mid-2014
Progress Cape Fear 316 NC 2017
Xcel Cherokee 1-4 1,069 CO By 2017
Xcel Arapahoe 3,4 156 CO By 2017
Xcel Valmont 186 CO By 2017
CPS Energy Deely 871 TX 2018
PGE Boardman 585 OR 2020
Centralia TransAlta 688 WA 2020
Centralia TransAtla 688 WA 2025
APS Four Corners 1-3 560 NM ---
Yes, I realize that many of these dates are far in the future, but there's no doubt in my mind that the trend of switching from coal towards natural gas for use in the generation of electricity is happening and will continue to pick up steam. According to a recent article by Reuters, "Stricter regulations being formulated by the U.S. Environmental Protection Agency to reduce air and water pollution as well as to control the handling of coal waste are expected to force the retirement of between 30,000 and 70,000 MW of coal generation across the country, according to several industry studies."
To say that natural gas is a "sucker's bet" is a joke and nothing more than a cheap way to grab headlines and publicity for yourself. The fact that I am talking about it proves that it worked. Having said that, I don't expect nat gas prices to rise dramatically in the future.
The million dollar question is then...how can one profit from this trend of increased natural gas volumes with low prices. The answer is to buy the companies that support the industry, like pipelines including my personal holdings of Enterprise Products Partners (EPD) and SemGroup (SEMG), as well as my investment in a company that helps clean provide and clean up the massive amounts of water that is used in fracing, Heckmann Corp. (HEK).
I'd love to hear others' thoughts on where the price of natural gas is headed.