When trying to understand how a commodity is priced, the best foundation is from a fundamental perspective. Simply stated, when supply is above demand, prices fall and when the inverse occurs, prices rise. However, this equation gets exponentially more complex for natural gas when attempting to parse our and quantify the demand side. Supply is much easier to look at, as we have very solid data on both production and storage figures.
Before LNG, demand was contained to North America, and thus the economic model for natural gas was much more straightforward. A lot of the demand came from heating buildings in the winter and its use as fuel for power plants. With power plants, you must compare the economic efficiency of natural gas with other fuel sources (coal, nuclear, etc.), and their corresponding prices, to accurately determine how high the demand for natural gas will be during any period.
Now that we are in the era of LNG, the demand types have not changed, gas is still being used to heat structures and fuel power plants. However, the locations that the gas can be sent has increased dramatically. As we stated in previous posts, Europe and East Asia are currently the major markets for LNG in the U.S. However, this has been the case with only one of our major LNG facilities operating; this year a handful more are coming on line. With this increased supply in LNG, prices are driven down, and thus potential markets open, as it becomes a more competitively priced feedstock. For example, as prices have fallen, new potential markets have opened in India, as it becomes more competitively priced against Indian coal. In Japan, demand is forecasted to weaken as nuclear plants are being brought back on line after the Fukushima disaster.
The increase in the complexity of the natural gas ecosystem guarantees only one thing: more volatility. We could see times where demand drops globally, and LNG facilities do not run at full capacity, but the opposite will also occur. This will present great opportunities to lock in high prices, or leverage producing assets to acquire new assets during a downturn. ARC has created innovative financial tools for the mineral rights owner and the independent producer to seize these opportunities.
Ask an ARC representative about your oil royalties today.