Natural Gas: The Cheapest Recovery Play?

From Dead Cats Bouncing:

While most assets tied to US economic recovery have soared in recent weeks on increased optimism fuelled by better incoming data, US natural gas remains firmly in the doldrums at sub $4, down from nearly $14 last Summer. Despite ample current supplies, it has the potential to soar over the next 12-18 mths on even a muted rebound in industrial activity given the collapse in drilling rig numbers to under 800, a level not seen since 2003, as shown in the chart below. Longer term demand dynamics are also bullish.

Oil supplies 40% of total US energy consumption, with coal and gas supplying 25% each (although coal supplies 50% of electricity generation). By 2020, more than 33% of the country’s electricity could be generated through burning natural gas. The reasons are simple: power plants that burn natural gas cost less and are far easier to build than nuclear power plants, are greener that coal and oil and don't have the legacy waste issues of nuclear. Renewables like solar and wind simply are not remotely competitive with fossil fuels at anything like these prices, and require huge grid upgrades to become more than a marginal contributor. Clean coal, gas and nuclear are the future of US energy generation.



With the expanding use of natural gas for residences and its use as the primary feedstock in the manufacturing process for a wide variety of products, demand for natural gas is expected to rise anywhere from 40 percent to 50 percent by 2020.

Although production rose by 11% from, 2006-8, many industry experts see a looming peak in production, in addition to another key constraint on supply in the form of limited infrastructure capacity to deliver that supply to consumers. The two modes for delivering natural gas are by pipeline and ships designed to hold and transport vast amounts of liquefied (refrigerated and compressed) natural gas (LNG) over the oceans. US state and local governments have made it increasingly difficult to build new pipeline networks, and have also complicated the transportation of LNG....MORE