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Oil barons seem to scowl looking at the continued fall in oil prices. Oil Prices dipped 40 cents on Jun 19 while Benchmark oil for July delivery ebbed 85 cents to $94.53 per barrel at midday Bangkok time in electronic trading on the New York Mercantile Exchange.

The decline followed OPEC leaders’ disclosure about boosting oil output by 106,000 barrels a day in May. According to the U.S. Department of Energy, crude oil supplies rose 1.8% year-over-year to 394.1 million barrels last week.

On the other hand, although natural gas inventories rose 95 bcf (billion cubic feet) to 2,347 bcf for the week ended June 7, storage level went down 587 bcf or 20.0% from last year and 58 bcf or 2.4% from the five-year average. This clearly indicates an increasing adoption of natgas.

Thanks to the shale gas boom in the U.S. More than 80% of the world’s natural gas is currently produced in North America and estimates suggest that there is a sufficient domestic supply that can last more than 150 years.

According to a study by Citigroup (C - Analyst Report), nat gas is capable of substituting up to 1.8 million barrels of oil a day or 5% of the current level of oil consumption in the transportation sector by the end of this decade. So, could natgas be a game changer in the energy market and overthrow the hegemony of OPEC member states?

Natgas has been extensively used in two sectors that give rise to a challenge to petroleum suppliers. They are automotive and utility.

Automotive     

Considering the automotive industry, oil barons indeed face an immense challenge. Being a much cheaper alternative, abundant and environment friendly, natgas score much higher points than traditional oil or gasoline in favor of the industry. Above all, it reduces a nation’s dependence on imported oil, which could definitely act in favor of balance of payments, especially when the global macro-economies have witnessed crisis after crisis.  

American businessman T. Boone Pickens, through its Pickens Plan energy policy (2008), has voted heavily against importing oil from foreign lands. The plan proposed the conversion of vehicle engines from gasoline to gas thereby reducing oil imports by one-third within 10 years. Pickens believed that the plan could curtail U.S. expenditure on oil imports by as much as $300 billion annually.

In this regard, a section of people has advocated using bi-fuel engines rather than natural gas engines in vehicles as it gives the convenience of using gasoline when natural gas is unavailable. However, according to a U.S. Department of Energy report, bi-fuel engines mainly suffer from lower power and efficiency whereas engines running exclusively on nat gas can have higher compression ratio due to its high octane rating, leading to improved energy efficiency similar to that of a gasoline engine.

However, using natgas as a transportation fuel has its own downsides. Firstly, there is a lack of adequate natgas refueling stations. A significant investment is yet to be made and supporting infrastructure needs to be built by both the government and corporate to address this problem.

Secondly, there are few CNG powered passenger vehicles available in the market till date. Very few automakers, except Honda Motor Co. (HMC - Analyst Report), dared to manufacture vehicles powered solely by CNG due to underdeveloped infrastructure for natgas.

In fact, automakers prefer to focus on fleets rather than passenger vehicles when the need to develop vehicles based on natgas arise. This is because fleets have a particular driving regime that makes them suitable for using natgas as transportation fuel.

Fleets maintain a limited driving range and return to a juncture most often in a day and that juncture could be the refueling station. It is for this reason many large corporations such as AT&T (T - Analyst Report) and Verizon Communications Inc. (VZ - Analyst Report) are opting for CNG-powered fleets instead of high cost gasoline-powered ones.

Thirdly, diesel-powered engines pose a major threat to adoption of natural gas engines. However, despite being a cost-saving option for consumers, diesel is less environment-friendly compared to natural gas. As a result, if the natgas infrastructure develops, this threat could be easily neutralized.

Utility

According to Edison Electric Institute, U.S. generates nearly 25% from its electricity using shale gas. Given the abundance and low-cost, it is highly probable that this percentage will go up in the near future.

Unlike before, when natural gas is used only for “peaking power plants," power companies now prefer to shift towards broader use of nat gas because it is convenient to turn on and off compared to coal due to its composition and help them reduce the consumer’s expenditure on power.

According to a study by Resources for the Future, the nat gas boom could help electricity consumers save at least $70 billion by the end of this decade. However, danger lurks as increasing adoption of natgas by utility companies could result in a spike in their prices.

Epilogue

Adoption of natgas could definitely be a game changer in the energy market given the increasing concern about green house gas emissions, cheap production and development of advanced engines and technologies. Although, slow adoption and underdeveloped infrastructure of natgas still put the oil barons on the winning side, they could only be a temporary solace.

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