#$dgaz

[mitchzacks]

What the Name “Aubrey McClendon” Means to Energy

In the last week of February, a historical event took place here in the U.S. when a tanker left the coast of Louisiana carrying America’s first liquefied natural gas (LNG) export to Brazil. Symbolically, the tanker marked a new era of energy production and trade and was a sign of the U.S.’s new position as an independent player in the Energy Sector.  

In many ways, this milestone was made possible by the decade-old shale boom that was pioneered and propelled by the energy visionary, Mr. Aubrey McClendon. Mr. McClendon died on March 2nd in a one-man car crash in Oklahoma City at 56 years old.

McClendon was undoubtedly a pioneer in the U.S. energy industry and a brash risk-taker. After graduating from Duke University in 1981, Mr. McClendon co-founded Chesapeake along with his friend Tom Ward. Beginning with just $50,000 and 10 employees in 1989, he transformed Chesapeake Energy Corp. into one of the world's biggest natural gas producers.

Mr. McClendon’s vision of gas replacing coal for power generation and oil for transport remained steadfast throughout his career. As a visionary, he was able to see the vast untapped potential of the shale industry long before many others, which helped wean the country from its reliance on foreign oil. He took action to mobilize agents across the country to sign up drilling leases on the most promising areas for shale development and swiftly built the largest acreage position in the U.S.

He was not the first person to combine the techniques of horizontal drilling and hydraulic fracturing to extract gas from previously unyielding shale rocks, but he was a chief leader in pushing the fracking revolution forward to utilize the new sources of natural gas and change the face of American energy.

Mr. McClendon might be remembered by many epitaphs (some of them negative) but his bold vision of the future of energy helped him play an important role in America’s energy renaissance. A decade ago, America was expected to become an importer of LNG, but the shale gas revolution in the U.S. unlocked cheap, abundant gas supplies enabling the country to become an exporter instead.

While McClendon’s career was not free of disagreements and accusations, McClendon was a bold leader who helped reset the approach to energy in this country.

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[jeffhirsch]

Seasonality could trigger natural gas rebound off 17-year lows

Our long natural gas trade from late February to late April boasts a 72.0% success rate gaining 18 out of the last 25 years. One of the factors for this seasonal price gain is consumption driven by demand for heating homes and businesses in the northern cold weather areas in the United States. In particular, when December and January are colder than normal, we tend to see depletions in inventories through February. This has a tendency to cause price spikes lasting through mid-April and beyond (shaded in yellow in next chart). However, just the opposite of this has happened this winter and natural gas price is trading at an almost unbelievable $1.673 per one million British Thermal Units (Btu). This is its lowest price it has traded going back over 17 years to at least 1999.

Our best trade scenario using the July natural gas contract has a holding period of approximately 41 trading days beginning on or about the 16th trading day of February and lasts until about April 23. Ample supply and stagnant demand in recent years has caused this window to move around and/or compress but there have been tradable late-winter or early spring rallies that have been profitable.

In the short-term, natural gas appears heavily oversold as a relatively mild winter has left inventories well above historical averages for this time of year. If the trend of above average temperatures persists into spring and beyond, electrical demand could rise earlier and sharper than usual which could lead to a spike in natural gas prices. Over the longer-term, the U.S. has begun to export natural gas and analysts expect exports could reach 10% of current output by the end of this decade.

[cpirrong]

I Think I Read These Predictions About the Impending Revolution in LNG Trading Somewhere Before

The FT, Goldman, Jonathan Stern at the Oxford Institute of Energy Research, Vitol, and others are now predicting that the emergence of the US as an LNG exporter, and the looming surplus driven by that plus supplies from Australia, PNG, and elsewhere, are inexorably pushing this commodity away from traditional oil-based long term contracts towards spot trading.

Huh. I remember reading something along those lines last September. Oh, yeah. Here it is. (Also available in Spanish!) I guess it’s more accurate to say I remember writing something exactly along those lines in September.

The opening of the Cheniere* and later the Freeport and Cameron LNG trains in the Gulf will be particularly important. The US is likely to be at the margin in Asia, Latin America and perhaps Europe. Prices are set at the margin, meaning that the LNG pricing mechanism can be integrated into the already robust US/Henry Hub pricing mechanism. Giving the tipping effects discussed in my paper, the transition in the pricing mechanism and the development of a robust spot market is likely to take place relatively rapidly.

I know there is skepticism in the industry about this, but I am pretty confident in my prediction. Experiences in other markets, notably iron ore and to some degree coal, indicate how rapid these transitions can be.

Funny story (to me anyways). I gave the keynote speech at LNG World Asia in Singapore in September, and I laid out my views on this subject. I gave the talk in front of the giant shark tank at the Singapore Aquarium, and I could help but think of Team America, Kim Jung Il, and Hans Blix. I’m sure there were a few people in the audience who would have liked to feed me to the sharks for calling oil-linked pricing “a barbarous relic” and encouraging them to embrace the brave new world of LNG trading.

But whether they like it or not, it’s coming. The inflection point is nigh.

*Full disclosure. Number One Daughter works for Cheniere.