But even more important, power generation usage will grow. This category will determine the price of natgas more than any other. In all previous posts, I have argued "weather, weather and weather" determined the price of natgas. No longer. While weather has the ability to temporary change the price of natgas, it no longer can deliver the large change in demand that is needed for prices to go back to $4 (much less $10!). Quite simply the basic demand for natgas from power generation has to increase for natgas to increase in price.
To see that the following chart shows the weather related demand for residential and commercial:
Notice the base (summer months) demand is relatively flat over the past 10 years. Likewise while the top tips are slightly higher, not by much. Quite simply residential and commercial demand can be seen as only slightly increasing.
So without major changes in how heating in residential and commercial buildings are generated, we will depend on industrial and power generation for increased demand.
Will this happen? For electric generation, it is happening:
Notice in the chart above, the baseload natgas demand has increased. This is very important, because one natgas power plant can consume alot of natural gas. It takes a ton of buildings to change heat sources to equal the demand from one natgas power plant. So one (the only?) source of increased demand is power plants.
What do we have on the regulatory front? We have the EPA just issuing new rules on emissions that make coal plants much more costly. They will shut down a significant number of coal plants and change the fuel to natgas. This transition is the only one that will quickly change the demand for natgas.
On the other side of the equation, we need to be careful not to expect too much from supply changes. The point being if the price were to rise from some temporary factors (a cold winter), the supply could increase very fast. The number of potential natgas wells is huge, if the price rises back to $5. Thus, until the baseline demand is significantly higher, natgas will not sustain a price above $4.
What about LNG? Here is the problem: the length of time it takes to permit, plan and build natgas export plants is years.... 5 years? We will not see ANY exports before 2014. Maybe 2016. Yes the possibility of significant demand for natgas from LNG exports exists, but we cannot build the plants before 2015. So between now and then power generation demand is the only source of increased demand that can really impact the price of natgas.
Conclusion: You can predict the natgas price by the size and number of natural gas power plants. Watch the trend and if the number of plants increases enough the demand for natgas may rise and increase price. Otherwise, any temporary increase in price will bring large amounts of supply to crush the price increase.
