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Geopolitics Aside, Natural Gas is Future of Energy

02/07/2019 10:20 am EST

Focus: ENERGY

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

While geopolitical concerns roil the markets, Phil Flynn discusses an EIA Report that suggests the future of energy is natural gas.

The daily crude oil charts seem to suggest that oil wants to breakout, but the anticipation of seasonal maintenance is making us wait. It is keeping us waiting. There are still fears of slowing demand, enhanced today by the European Commission which cut its growth forecasts for the euro region’s major economies to 1.5% this year from 2.1% in 2018. Yet, there are also concerns about the supply side as the political standoff in Venezuela does not look like it is getting settled anytime soon. 

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This ongoing dispute is now educating America about different blends of crude oil and why at least, at this point, the U.S. shale oil revolution is not the answer to all the oil market’s complexities. Oil also saw some pressure on reports that Libya’s largest oil field might be back in operation, but don’t count those barrels until they are pumped. Yet despite talk of slowing demand for oil, the Energy Information Administration (EIA) reported exactly the opposite. We also had a report from the Wall Street Journal that the nation’s railroads are not seeing any sign of a slowdown.

The EIA headline numbers that on balance were very supportive. The EIA reported that crude oil inventories increased by 1.3 million barrels, led by a surge in Cushing Oklahoma supply that increased by a shocking 1.4 million barrels putting supply at the delivery hub at a 42.6 million barrels, a one year high.

Gasoline inventories though only increased by 0.5 million barrels last week, just 5% above the five-year average for this time of year.  Distillate fuel inventories on the other hand fell by 2.3 million barrels last week and are about 4% below the five-year average for this time of year. Distillates are going to become a problem if OPEC keeps cutting and Venezuelan oil is not going to be around. Total commercial petroleum inventories decreased last week by 3.4 million barrels.

Yet, what was supportive for oil was the overall demand, especially if you look at the four- week averages. Demand for oil averaged a hefty 21.2 million barrels per day, that was up by 2% from the same period last year. Over the past four weeks, motor gasoline demand averaged 9.0 million barrels day, up by 1.6% from the same period last year. Distillate fuel demand averaged 4.5 million barrels per day over the past four weeks, up by 6.4% from the same period last year. The only area where we lagged was jet fuel demand that was down 0.5% compared with the same four-week period last year. So, the talk of weak demand in oil really is not happening.

It is not happening in petrochemicals either. The Wall Street Journal reported that “Big Railroads Don’t See Slowdown on Horizon for U.S. Economy. Union Pacific, CSX chiefs say customers are shipping more grains and chemicals, despite worries over trade policies.” 

In a must read, they write that “Railroad executives played down concerns about a cooling U.S. economy, which they said remains on solid footing as growing shipments of grain, oil and e-commerce packages offset broader worries over trade policy and volatile stock markets. The chief executives of CSX Corp. (CSX) -0.26% and Union Pacific Corp. (UNP) -0.35% said conversations with their shippers, which represent a broad cross-section of industries from agriculture to chemicals, generally show optimism about the coming year. CSX CEO Jim Foote said customers plan to ship more goods and are also moving ahead on long-term capital projects, including expanding facilities. “When you talk to the business people, they’ve always indicated that the economy was still in good shape,” Mr. Foote said in an interview last week.”  Not to mention that railroads use a lot of diesel that will become tighter the longer that the Venezuelan oil is off the market.

Oil also saw some pressure on reports that Libya’s largest oil field might back in operation but don’t count those barrels until they are pumped. The AFP reports that a force led by Libyan military strongman Khalifa Haftar, engaged in an offensive in southern Libya, said late Wednesday it had seized one of the country's biggest oil fields without a fight. Ahmad al-Mesmari, spokesman for the self-styled Libyan National Army, said the force had earlier that day entered the Al-Sharara field, around 900 kilometers (560 miles) south of Tripoli. The field normally produces 315,000 barrels of crude per day —  nearly a third of Libya's overall output — but has been shut down for nearly two months by armed groups, which complain of marginalization by Libya's Tripoli-based unity government.

Oil is consolidating as it awaits answers to questions. But with demand holding up and OPEC cuts taking their toll, the risk is for a big move to the upside in the coming months.

The Future of Energy Generation

While natural gas can’t catch a bid, it still is going to be one of the world’s most important fuels. The EIA reports that “The mix of fuels used to generate electricity in the United States has changed in response to differences in the relative costs of electricity-generating technologies and their fuels. EIA’s Annual Energy Outlook 2019 (AEO2019) shows that projected generation and capacity is significantly influenced by natural gas prices. In the high oil and gas resource and technology scenario, a sensitivity case with low natural gas prices, natural gas provides 54% of all U.S. electricity generation by the end of the projection period.

In the low oil and gas resource and technology scenario, a corresponding sensitivity case with high natural gas prices, the natural gas generation share falls to 21%.  On an annual basis, natural gas surpassed coal in 2016 as the fuel most used to generate electricity in the United States. In the AEO2019 reference case, natural gas remains the leading source of electricity generation through 2050. In 2018, natural gas accounted for 34% of total electricity generation, and EIA projects its share to grow to 40% by 2032 and then remain between 39% and 40% throughout 2050.

Electricity generation shares from coal and nuclear gradually decline as coal and nuclear become less cost competitive compared with natural gas and renewables. Renewables generation surpasses nuclear by 2020 and surpasses coal by the mid-2020s as tax credits and lower capital costs drive solar photovoltaic and wind capacity additions.

The report went on to note the following: “The natural gas share of U.S. electricity generation largely depends on natural gas prices. Relatively low natural gas prices lead to higher utilization of existing plants and to more natural gas power plant construction. The price of natural gas delivered to electric power plants averaged $3.42 per million British thermal units (Btu) in 2018, and in the AEO2019 Reference case, EIA projects that it will average (in real dollar terms) $5.36 per million Btu in 2050. In the low oil and gas resource and technology case, higher extraction costs and lower resource availability result in less natural gas production, and the natural gas price for power plants increases to $8.62 per million Btu in 2050. Conversely, in the high oil and gas resource and technology case, which has the opposite assumptions for resource extraction costs and availability, EIA projects that natural gas prices will remain well below $4.00 per million Btu through 2050.

Because of lower natural gas prices, the share of natural gas-fired generation in the higher cost case is considerably higher than in the reference case, displacing renewables, coal-fired, and nuclear-powered generation. Natural gas-fired plants exceed renewables as the leading source of new capacity additions, and more existing coal-fired and nuclear-powered generation capacity is retired. Nuclear-powered electricity generation is lower in the High Oil and Gas Resource and Technology case because almost half of the current nuclear power plant fleet retires by 2050.”

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