By this time in 2015, the first liquid natural gas (LNG) exports from the United States should begin their journeys to points in Asia and Europe.
That’s when Cheniere Energy Inc's (ARCA:LNG) Sabine Pass terminal is scheduled to be completed and begin chilling natural gas to 260 degrees below zero for transportation.
The terminal marks the beginning of a major increase in LNG exports from the United States. And with increased exports comes new demand.
The problem is, many experts believe this excess demand will cause energy prices in the United States to spike higher – just in time for next winter.
According to speculators, you should be preparing for some hefty energy bills.
At least that’s what conventional wisdom says…
Will Prices Skyrocket?
First of all, let me shed some light on the timeline for natural gas exports…
In reality, I doubt that Cheniere will meet its own deadlines. The fact that Cheniere has taken more than a decade to get the terminal even close to completion gives me little faith that the terminal will be ready next year.
The schedule seems too optimistic. Realistically, I think LNG exports will begin in earnest two years from now from a variety of sources, including Cheniere. Dominion Resources Inc (NYSE:D) Cove Point Facility on the Chesapeake Bay and another facility that ConocoPhillips (COP) is involved with in Texas should begin exports in 2016 and 2017, respectively.
Regardless of exactly when they start, however, LNG exports are on their way.
Based on the current natural gas prices of $4 per British thermal unit (Btu) in the United States, the price per Btu will be around $10 in Europe, slightly less for South and Central America, and close to $12 for Asia.
This will undercut the market prices that those countries are currently paying – between $1 and $3 per Btu. When you multiply the new prices by millions or billions of Btus, you’re talking about some serious money.
The United States will be responsible for a large chunk of those exports. Cheniere has stated that when its operations are fully engaged, it will be buying over 6% of the natural gas produced by the United States. Add in the other projects I mentioned, and you’re over 10%.
With United States exports about to blast higher – along with the increased demand – experts are expecting LNG exports to force natural gas prices much higher.
Don’t Jump Off the Bridge
The issue here is that conventional wisdom is often wrong.
Natural gas demand will increase – there’s no doubt about that. By the end of this decade, the United States will grab the third spot, behind Qatar and Australia, on the LNG export leaderboard.
However, the price of natural gas in the United States will NOT spike as a result of anything other than speculation.
You see, the same thing happened last January when speculators were pumping up the market. Speculation brought natural gas call options to a $10 strike price during the polar vortex earlier this year. That speculation sent natural gas prices shooting above $6 per thousand cubic feet (mcf), only for them to come crashing down to around $3 this past summer.
If there’s one thing the United States is flush with, it’s natural gas. Investors should keep in mind the solid evidence indicating natural gas’ abundance.
For instance, oil wells in the Bakken have flared – burning the natural gas that accompanies the oil to the surface – because they had no market for it.
And consider that natural gas rigs have declined by more than 50% this past decade due to greater efficiency, yet supplies of natural gas have increased as more users have adopted this energy source.
Yes, natural gas is abundant. In reality, it’s too abundant. That fact alone will keep natural gas prices in a tight range between $4 and $5 for the next few years with intermittent variations based on weather conditions.
LNG exports will do nothing more than stoke greater production from vast fields that are sitting idle (due to current prices). If you’re going to bet on natural gas exports, bet on the companies that will export the gas – and not on the commodity itself.
And “the chase” continues,