Analysis: Supply test looms for Obama's darling natural gas

Thu Jan 30, 2014 5:01pm EST
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By Julia Edwards

NEW YORK (Reuters) - While the United States is sitting on a bounty of natural gas, the wild volatility of prices this winter could soon become a regular feature as growing demand begins to test supply, potentially curbing plans to increase exports and switch power plants to gas from coal.

Ample reserves have depressed prices since 2008, but sudden surges in consumption could jolt the market as early as 2015 when new exports coincide with higher domestic demand and lagging production for the fuel championed by President Barack Obama in his State of the Union speech on Tuesday.

Signs of strain have already emerged. The coldest winter in decades pushed prices for natural gas, which is used to heat homes and produce electricity, to four year highs and exposed inadequacies in the pipeline network. Some prices in the poorly supplied northeast of the country rose to all-time highs above $120 per million British thermal units on January 21, more than $100 higher than the previous week.

"As demand comes, we are sitting here fat, dumb and happy," said Vikas Dwivedi, an energy market strategist at Macquarie Group. "But you need a price signal ahead of time to stimulate the production growth."

Dwivedi predicts a first period of high prices to last for up to 6 months in 2016 and be followed by continual unpredicted surges as new projects demanding natural gas come online.

The current price spike and any future volatility will not alter the decades' worth of supply - thanks to new techniques such as fracking to release oil and gas from shale deposits - so the long-term outlook should remain the same.

Exports of natural gas to Mexico are expected to double in the next two years, just as companies begin shipping liquefied natural gas from new export projects to Europe and Asia. At the same time, more gas will be used at home in industry and electricity generation as coal plants retire.

In all, U.S. demand for gas, including domestic use and exports, could rise by 15 percent by 2018, according to Reuters estimates. Meanwhile, after a 20 percent growth in supply because of booming shale drilling since 2007, production increases are expected to slow to only 2.1 percent in 2014 and 1.3 percent in 2015.   Continued...

U.S. President Barack Obama pauses while he speaks after he tours General Electric's Waukesha Gas Engines facility in Waukesha, Wisconsin, January 30, 2014. REUTERS/Larry Downing