Abundant US Natural Gas Supply Slakes Asian Demand

Gas prices are expected to remain depressed in the U.S. with the EIA weekly report on gas inventories in the U.S. showing a higher than expected build up of reserves as the increase in production outstripped demand. ^[1] Players like Anadarko Petroleum (NYSE:APC) have used technologies such as hydraulic fracturing (“fracking”) and horizontal drilling to boost the American gas supply. In contrast to low prices in the U.S., strong growth in liquefied natural gas (LNG) demand from China, Japan and India is resulting in prices for liquefied gas rising despite macroeconomic concerns. Analysts expect exports from the U.S. to meet international demand over the long term. ^[2] Natural gas sales are an important driver for firms such as Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP) and BP (NYSE:BP).

We have a $85 price estimate for Anadarko, which implies a 13-14% premium over its current market price.

Oversupply in U.S. markets

The EIA long term forecast expects the U.S. to increase its Natural Gas demand to increase by 14% from 2008 to 2035 with growth in the industrial and utility sectors. ^[3] However despite increasing demand, supply from shale deposits across the U.S. are expected to flood the market and their output is expected to triple from present levels by 2020. ^[2] Despite depressed natural gas prices, LNG prices in the U.S. have risen in anticipation of demand from Asian countries. Liquefied gas can be shipped across to foreign markets and some estimates suggest that the U.S. could export as much as 5 Bcf / day of LNG by 2017 to meet the requirements in Asia and Europe.

LNG prices have increased by almost 33% since the Fukushima disaster that has forced countries to take another look at their nuclear energy installations. ^[2] Global demand has increased by 9% in the first six months of 2011, and we expect prices to rise even further throughout the rest of the year as demand increases in the winter months. Higher revenues from gas sales will also temper the fall in oil prices.

Asian demand to remain strong

While Japan has seen its LNG demand grow by 21% since the nuclear disaster in March this year, much of the anticipated growth in gas usage in Asia is likely to come from China and India. ^[2] Chinese imports of liquefied gas have jumped 27% in the first half of 2011 and India is expected to double its gas usage from 2008 to 2015. ^{[2] [3]} With domestic supply failing to keep up with growing industrial demand, the countries are looking to ramp up their LNG import infrastructure to facilitate easy trade.

Countries such as Qatar, Malaysia and Australia are ramping up their production of LNG in response to demand from India and China. Exxon Mobil, Chevron and ConocoPhillips are already building capacity in these countries to benefit from the shift towards natural gas in Asia.

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1. EIA Reports Bearish Gas Build, Bloomberg [↩]
2. LNG Surges as Japan Vies With China, Exxon’s Shipments Grow, Bloomberg [↩] [↩] [↩] [↩] [↩]
3. International Energy Outlook 2011, EIA [↩] [↩]