Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

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Natural Gas Prices Collapse

The energy glut now extends far beyond oil; various news sources are reporting that natural gas prices fell to a two-year low in New York because of a huge surplus.

The price of natural gas for January delivery fell by 25.3¢, or 7.3% a British Thermal Unit (BTU), in Monday morning trading at the New York Mercantile Exchange, Bloomberg reported. That means natural gas would cost $3.211 a BTU in January, or $1.40 less than the pipeline price for a BTU of natural gas in April 2014, which was $4.66, according to the U.S. Energy Information Agency.

It’s hard to see how this will affect the residential price of natural gas because that gas was paid for months ago, but it’s sure to have an effect at some point. What’s easy to see is the reason for the low prices; there’s simply too much natural gas out there.

America’s natural gas stockpiles had grown to 3.295 trillion cubic feet as if Dec. 12, 2014, according to JPMorgan Chase & Company. That is 47 billion cubic feet more than last year, and the surplus could grow to 200 billion cubic feet by early 2015.

The reason for this is fracking, which has greatly increased the U.S. natural gas supply. We are swimming in natural gas, much as we are swimming in oil; instead of facing an energy shortage, the world is facing an energy glut.

Natural Gas Producers’ Revenues up Despite Glut

That’s not very good for natural gas producers such as Chesapeake Energy (NYSE: CHK)—or is it? Chesapeake’s TTM revenue has grown by nearly $4 billion in the past year. In September 2013 Chesapeake reported a TTM revenue of $16.5 billion that grew to $20.44 billion in September 2014.

Natural gas could soon be a major US export.
Natural gas could soon be a major US export.

Nor was Chesapeake alone in growing revenues. EOG Resources (NYSE: EOG) reported a TTM revenue of $13.75 billion in September 2013 that grew to $17.14 billion in September 2014, another increase of nearly $4 billion. Devon Energy (NYSE: DVN) reported an even bigger increase. Its TTM revenue grew from $10.35 billion in September 2013 to $16.2 billion in September 2014, an increase of nearly $6 billion.

What’s going on here? Why are these producers’ revenues shooting up as supplies and prices fall? My guess is that basic behavioral economics is kicking in here; when something’s cheaper, people buy more of it and use more of it, just like you buy more at Wal-Mart Stores Inc. (NYSE: WMT) and Costco Wholesale (NASDAQ: COST).

Basically, these companies are in the energy discounting business; they make money as sales increase. Sales are liable to increase as natural gas prices fall, particularly as it becomes more competitive with coal and oil as a fuel source. Natural gas creates less pollution, which makes it more attractive.

Honda, for example, is betting big on natural gas as an auto fuel. It’s even promoting a natural gas-burning version of its popular Civic sedan. Chrysler has also developed a natural gas-powered version of its popular Dodge Ram 2500 pickup truck and a new kind of natural gas tank for it.

Natural gas is also becoming more popular as a fuel for electric power plants. Its popularity could grow in coming years because of the Obama Administration’s air-pollution regulations, which could close hundreds of coal-burning power plants.

The long-term prospects are even brighter because of fuel cell technology; particularly next generation fuel cells such as Redox Power Systems’ Cube, which runs on natural gas. A refrigerator-sized Cube could put out enough electricity to power a mini-mall, and it is more efficient than competitors such as Bloom Energy’s natural gas-burning energy server.

If Redox’s claims about it are accurate, the Cube would be one tenth the size and one tenth the cost of current fuel cell technologies when it comes on the market. It could also generate heat and electricity at 80% efficiency. In contrast, a gasoline or diesel engine operates at around 35% efficiency.

The Cube, Redox's natural gas burning fuel cell could go anywhere.
The Cube, Redox’s natural gas burning fuel cell could go anywhere.

The Cube will first be sold as a residential and commercial power source; it’s being tested in Microsoft data centers. What’s even more interesting is that the Cube’s creator, University of Maryland Professor Eric Wachsman, believes that it could be used to power vehicles. Wachsman has even predicted that his fuel cell technology could one day triple the gas mileage of vehicles. Toyota, Hyundai, and Honda are already marketing vehicles run by hydrogen fuel cells, so Wachsman’s hypothesis is not that farfetched.

It looks as if natural gas could be our fuel of choice for the foreseeable future.


Disclosure: The author is long on Chesapeake Energy (NYSE CHK).