Supply Constraints Mean Pricing Pressures

Plentiful natural gas may lead to a softening of energy prices over the short run, but one thing seems to be clear: energy prices are expected firm over the next six years or so.

ICF International has released its ICForecast Energy Outlook for the first quarter of 2014. The outlook projects gas prices to remain soft in the near-term due to continued growth in Marcellus shale gas production. After declining most of the year, rig activity in the Marcellus appears to have leveled off and other planned pipeline expansions will likely encourage additional drilling activity in the coming year.

Looking further out, ICF expects prices to firm between 2015 and 2020 as demands from new petrochemical plants, LNG export terminals, and pipeline exports to Mexico start ramping up. These new demands, combined with continued increase in gas use for electric generation, will place significant upward pressure on gas prices and increase the potential for price volatility through the end of the decade.

Power markets will be strongly influenced by these gas price trends and projected coal retirements due to the requirements of the Environmental Protection Agency (EPA) Mercury and Air Toxics Standards (MATS) rule. Taking coal units offline as the economy continues to recover will create a need for new natural gas capacity, the report says.

As this transition from coal to gas plays out at the same time gas prices firm, ICF projects energy prices to strengthen. These effects will be seen most strongly in the Midwest and Southeast U.S., where the majority of US coal capacity is located. Additionally, recent nuclear retirements will remove base load capacity from the supply stack and pressure energy prices to the upside in the affected regions.