Musings from the Oil Patch
Comment of the Day

September 28 2012

Commentary by Eoin Treacy

Musings from the Oil Patch

Thanks to a subscriber for this edition of Allen Brooks' always educative report for PPHB. Here is a section:
The greatest change in the United States has been the role of natural gas in generating electricity. Between 1990 and 2010, the share of electricity generated from natural gas nearly doubled from 12.3% to 23.8%. The real impact from gas shale production, however, came during the past several years as gas' share of electricity generation reached 34.7% in July 2012. The impact of gas shale production cannot be understated. In 2000, shale gas accounted for about 2% of total U.S. gas output. That share has now risen to about 40%. This increase has been the principle cause of the decline in gas prices. As the mix of fuels used to generate electricity shifted, utility executives would say, “the market made me do it” rather than “the mandate made me do it” as has been the case with increased electricity generated from renewable fuels. As the various state mandates for increased use of renewable energy supplies in generating electricity gained traction, between 2008 and last July, the share of power from these green energy resources has expanded from 3.2% to 4.2%. This calculation excludes hydro power, which the Obama administration has not backed as a renewable resource. Including hydro power, the share of renewable energy has grown from 9.4% in 2008 to 10.8% in July.

As an example of how America's energy thinking has been turned upside down, we only have to note that under the old thinking the country would have had dozens of terminals in operation by now to import and re-gasify liquefied natural gas (LNG) from overseas. Instead, the government recently has approved the construction of liquefaction facilities at one import terminal to allow its owner to export domestic gas to foreign markets. Some 13 additional facility applications have been filed seeking approval to export natural gas. Completion of a study commissioned by the Energy Information Administration (EIA) to assist the Obama administration in deciding whether to approve any additional export facilities has been delayed for a second time this year and will not be ready until after the November election. This appears to be shades of President Obama's handling of the Keystone pipeline decision

Eoin Treacy's view My view – The simplest rule of economics is that when the price of a commodity decreases demand increases. Natural gas offers an excellent example of this process at work as the economics of low absolute and relative prices encouraged substitution among utilities and transportation fleets. The other side of the equation is that lower prices contributed to uneconomic production and led to a change of emphasis from dry wells to natural gas liquids.

These conditions have helped support natural gas prices over the last few months as short positions were reversed. The current fairly steep contango can be considered normal for the time of year and the spread between nearby contracts should tighten as the winter progresses. Front month prices have been consolidating above $2.50 for the last couple of months and a clear downward dynamic would now be required to question potential for additional upside.

I last reviewed US utility companies on May 11th when a number had found support in the region of their respective 200-day MAs. The Dow Jones Utilities Average (3.95%) rallied to a peak near 500 by early August and has pulled back to the region of the 200-day MA where it has found at least short-term support. A sustained move below the trend mean would be required to question the consistency of the medium-term uptrend. Southern Corp (4.27%) and Consolidated Edison (4.06%) share a similar pattern.

As well as electricity generation, CenterPoint Energy (3.81%) also has a natural gas distribution business. The share found support in the region of the 200-day MA and $20 a month ago and a sustained move below that level would be required to question medium-term potential for additional upside.

Black Hills Corp (4.19%) is widely diversified within the energy complex and broke out of its two-year range last week. It will need to hold the majority of the recent advance if the benefit of the doubt is to continue to be given to the medium-term upside.

El Paso Electric (2.81%) has been mostly rangebound for a year but has been consolidating below the upper boundary for the last few months and a sustained move below the 200-day MA would be required to question potential for a successful upward break

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