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Mercantor Partners: it's time to bet on natural gas

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Hydrocarbon Engineering,

According to Joe Petrowski, Founder of Mercantor Partners, at its peak, the US was producing almost 100 billion ft3/d of natural gas – the equivalent of 1 billion bbls of oil. There were a number of factors that finally reduced the price of US oil, but contrary to popular belief they weren't simply the great recession and the Saudi Arabia-Iran market share tussle.

Fracking, and the immense stockpile of natural gas the US has accumulated as a result, was a huge contributing factor. The actual proper ratio of natural gas to crude is as highly debated as gold to silver, largely because natural gas is quoted in dollars per million cubic feet while oil is quoted in barrels. But regardless of the exact ratio it is obvious that natural gas contributed to crude's collapse, and as such it is time to bet on natural gas as it is perfectly positioned to take a bigger slice of the market.

Natural gas enjoys an environmental advantage over crude, while crude has the edge when it comes to storage and transportation. However natural gas is eating in to crude's key advantages, which will have significant implications for both the petroleum and the natural gas market.

"Natural gas is beginning to fight for the transportation market," said Joe Petrowski, Founder of Mercantor Partners, and former CEO of Gulf Oil LP. "It's already significant in Class 6 to Class 8 heavy duty trucks, with many large shipping organisations converting their fleets. And we should soon see natural gas start breaking in to light duty vehicles, and ultimately small commercial and even residential vehicles."

The US currently has about 240 million vehicles with an abnormally high average life span of nearly 11 years. This makes the market ripe for new production, and much of that will be natural gas based. China will likely follow soon, with 20 million vehicles at an even more advanced age. Current demand is approximately 1 billion ft3/d, but by 2020 the market could easily grow to five or even 10 billion ft3/d. There is also a new natural gas market developing – exports. Mexico is already importing 5 billion ft3/d from the US, and that will likely double in the next four years.

"Natural gas export facilities and pipelines are naturally being delayed by the usual factors (environmentalists and anti oil lobbyists), but the capacity for as much as 20 billion ft3/d already exists," continued Petrowski. "And despite the typical road blocks, new facilities will eventually get built, increasing US power and influence and eliminating our trade imbalance. When one considers these two factors, it's clear we can expect a significant turnaround in gas prices, equity, and asset value."

Power demand and power supply are going in opposite directions. We continue to decommission coal and nuclear plants all while demand surges due to the proliferation of data centres and flat screen TV's. Power demand has dipped (13 billion ft3/d) recently due in large part to a warm winter, but it should pick back up as new home building strengthens, conversions from petroleum continue, and local distribution systems are upgraded."

US natural gas production is robust at 73 billion ft3/d, but will drop into the high 60s by the fourth quarter this year due to a comparatively low rig count (464). However, the prospect of brownouts, blackouts, and a power price of US$0.25/kWh will be enough to win over even the most staunch opposition to natural gas.

Soon demand will outstrip supply by as much a 10 billion ft3/d, making the 5.7 trillion ft3 stock number of November, 2015 move closer to 5.0 by 1 November 2016. This will certainly keep natural gas prices from collapsing, and it will likely hover closer to US$4/million Btu than US$2/million Btu.

"This is good for energy prices, good for the US, and good for equity valuations," concluded Petrowski. "We should soon start to see natural gas fill the gap between demand and supply. And while the race doesn't always go to the fleet, and battle doesn't always go to the strong, that's always how you bet. Bet on natural gas, energy, and the US."

Adapted from press release by Rosalie Starling

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