A global demand boom and improving domestic economy have the potential to hike long-term US gas prices considerably higher than many might expect, despite the abundance of shale resources, an executive with JPMorgan said Tuesday.
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Colin Fenton, the company's global head of commodities research and strategy, said gas prices over the next few years could jump well beyond the commonly assumed ceiling of $6.50/MMBtu. In fact, on some days of high demand, he predicted gas prices could "spurt" up to the $7/MMBtu or $8/MMBtu level by 2016.
"Most people think this is impossible, and that's part of the problem," Fenton said at the LDC Gas Forum Midcontinent in Chicago.
Due to "a very stealth but very real change in the export posture of the US," the nation is poised to become a global gas superpower via exports of liquefied natural gas, he said.
And when producers and consumers in the West start to see gas shipped to countries such as China or Japan, "they will be very stunned to realize basis has tightened very quickly," Fenton said.
Fenton also pointed to longer-term support from an improving economy on US shores. For example, after years of decline, Pittsburgh is finally starting to see an uptick in manufacturing activity, driven largely by the mining sector -- specifically drilling for gas.
Moreover, the US must still rely on Canadian imports to meet its daily demand needs, he asserted. "The US is not self-sufficient. Even after the shale boom, demand for gas still exceeds production."
"This is a pot of water boiling on the stove," Fenton continued, adding that long-dated, forward-curve prices could jump sharply within the next few years if, for instance, interest rates are hiked or a large utility enters the market as a buyer.
Fenton said he was surprised this jump in longer-term prices has not yet occurred, but noted that many utilities are prohibited by state commissions from putting on long-dated hedges.
Yet volatility in the gas market will likely be nowhere as severe as in the oil market. Despite his higher price outlook, Fenton likened potential gas volatility to that of current-day Algonquin Gas Transmission city-gate spot pricing -- "nothing, nothing, nothing, spike."