Here’s a helpful anecdote to explain the universal draw of the shale oil and gas market:
During its last fiscal year that ended this past February, home improvement retailing giant Home Depot was intent on not opening a single new store in the US, with one exception – a 100,000-square-foot structure in Minot, North Dakota, the heart of the American shale and oil gas boom.1
The move by Home Depot and other retailers to open physical locations in energy-focused towns in North Dakota, Texas and Louisiana in an otherwise tough environment for retailers is indicative of how, as one energy analyst put it, “the US shale gas boom has transformed the global energy equation.”
According to Vishnu Sankaran, associate director at Frost & Sullivan, “the low cost of natural gas, once considered a prerogative of the GCC [the Arab Gulf energy alliance], has been turned on its head by the shale gas boom. The US has suddenly become extremely competitive due to lower electricity costs powered by natural gas.2
The resulting cheap and abundant supply of ethane also means the US petrochemicals industry is now capable of challenging lower costs in the Arab nations, Sankaran said.
The low cost of natural gas has also resulted in new opportunity for US energy companies to sell fuels to China.
Sinopec, the Chinese state-owned energy company said last week it signed a long-term contract to buy liquefied petroleum gas, or propane, from US refiner Phillips 66.3
Sinopec’s latest deal comes as more Chinese petrochemical companies begin sourcing propane from the US to feed a wave of new chemical plants that can turn propane into more valuable propene, a building block for chemicals used in consumer products like paint, carpets and detergents.
Although Chinese companies can make their own propane, the process is more expensive because of tighter supplies of crude oil and natural gas in that country.
And US propane prices have traditionally been too high to justify shipments to China, analysts say. However, the boom in US natural-gas production resulting from shale-rock drilling technology has sent natural-gas prices tumbling to their lowest levels in years, according to the Wall Street Journal.
Sinopec said the price of propane in the US is “more competitive” than in other markets because of rising supplies of US shale gas and as propane produced from natural gas is of higher purity than propane produced from refining.
Relatively low natural gas prices, however, haven’t necessarily damaged the bottom line – and stock prices – for shale gas-related companies. The Shale Gas motif has increased 32.2% in the past 12 months. In that same time period, the S&P 500 is up 20.4%. Over the past month, the motif has gained 9.3%; the S&P 500 has risen 0.5%.
What’s more, this could be the year we see natural gas prices get off the mat. A cold winter in North America caused a big increase in heating demand but also forced some natural gas producers to cut production in some parts of the US. Inventories have declined to lows not seen in 15 years.4
Gas production has rebounded strongly, according to the US Energy Information Agency, which believes gas inventories will refill to 3.4tn cubic feet by the end of October. But that would mean a refill of 2.55tn cubic feet, which would be the sharpest seasonal refill of US natural gas storage in over a decade.
However, as the FT explained, the market believes this will happen. Henry Hub futures, the benchmark for natural gas, have pulled back toward 2014 lows. And shares in exploration companies which have a relatively high weighting to gas – such as Chesapeake Energy — have lagged behind their shale oil peers, suggesting most investors do expect this seasonal surge in gas production to cover any shortfalls.
But all that extra gas isn’t in storage yet. The US could experience a hotter than normal summer, with greater than usual cooling demand from air-conditioners. That would be bad news for the supply shortage, which could send gas prices up to new highs. On the other hand, that may be good news for shale gas-related names and their investors.
1Shelly Banjo, “Home Depot Joins the Shale Rush,” WSJ.com, April 16, 2014.
2Robert Anderson, “Dealing With the Shale Gas Equation,” gulfbusiness.com, April 12, 2014, http://gulfbusiness.com/2014/04/shale-gas-equation/, (accessed April 30, 2014).
3Wayne Ma, “US Shale Boom Creates Chances for Propane Sales to China,” WSJ.com, March 14, 2014.
4Lex column, “US natural gas: storing up problems,” FT.com, April 23, 2014.