What does bulging natural gas supply mean for your business?

Natural gas prices are back in the doldrums after a brief rally this winter. Output is high and demand is tapering off as spring weather arrives across the U.S. And there’s a genuine risk that prices could fall even further, depending on the weather this summer. What does it all mean for energy producers and investors?

Natural Gas Prices: Apocalypse Soon?

Gas prices are in the basement. At $1.86 per million British thermal units (MMBtu), the benchmark futures contract is back near the lows it reached last December, when an unusually mild start to winter quashed heating demand throughout much of the country. February saw gas futures tumble all the way to $1.64 per MMBtu, the lowest closing price in 17 years. The average rates paid by homeowners, manufacturers and power plants are also trending lower.

And spring is unlikely to bring much relief for gas producers. The arrival of mild weather marks the start of the “injection season,” when heating demand subsides and excess gas production goes into underground storage for later use. This year, that process will begin with gas stockpiles still elevated compared with their seasonal average because of the relatively mild winter of 2015-16.

At the beginning of winter, which was shaping up to be a warm one, we did some back-of-the-envelope calculations and figured that gas stockpiles might fall to about 2.4 trillion cubic feet (TCF), which would be far higher than normal. Last week, the Department of Energy estimated that stockpiles will indeed bottom out around that level by late this month. By comparison, stocks fell all the way to 1.5 TCF last spring, after the much colder winter of 2014-15.

Bulging spring storage levels mean the gas glut could reach epic proportions later this year. If gas demand stays week during spring and summer, there is some chance that energy producers might run out of physical space to store their surplus output. According to the DOE, the U.S. has enough storage capacity to hold somewhere between 4.3 TCF and 4.7 TCF of gas. In other words, available storage will already be half-full at the start of injection season and could approach its limit by the time cold weather returns in the autumn. If there’s even a risk of storage overflowing, gas prices could plummet from today’s already depressed levels.

Demand: Heating Up?

Only a jump in gas demand looks capable of giving prices any lift this summer. Normally, you would expect low prices for a commodity to curtail new production and bring the market back into balance. But U.S. gas output remains resilient, even as the number of rigs drilling for gas continues to drop. Energy firms continue to drill more efficiently, extracting more gas per well as they race to cut costs amid low prices. The DOE estimates that gas output will hold pretty steady this year, increasing by a bit less than 1% from last year’s record high.

Demand could soar if the summer of ’16 turns out to be a scorcher. For the first year on record, natural gas will generate a larger share of the nation’s power than coal will. (A decade ago, King Coal accounted for half of all generation.) So when the mild temperatures of spring give way to summer heat, more of the nation’s air conditioners will be running on electricity supplied by gas-fired plants than ever before.

An average summer probably won’t suffice to stoke up natural gas prices. Bentek Energy reports that from November 2015 through February 2016, the U.S. electric sector increased its gas consumption by 17% compared with the same period a year ago. Returning to our back-of-the-envelope math, we figure that if that trend continues this summer, power plants will burn an extra 785 billion cubic feet of gas. That still wouldn’t be enough to keep gas stockpiles from swelling to about 4.2 TCF by autumn — a record high, and perilously close to the nation’s maximum gas storage capacity.

But a brutally hot summer would send demand for gas into overdrive, keeping stockpiles from ballooning too much. If power plants have to burn 20% more gas this summer than last to keep up with electricity usage, stockpiles would probably only reach about 4 TCF: close to their record peak in 2015, but manageable. If gas usage jumps by more than 20%, stockpiles will fall short of the 4 TCF mark, which could be bullish for prices.

Forecasting the weather three months in advance takes a lot of guesswork. But for what it’s worth, the National Weather Service’s Climate Prediction Center sees warmer-than-average temperatures across the entire continental U.S. for the months of June, July and August — exactly what it will take if gas prices are going to stage any sustained rebound this year.

A Word on Oil Prices

Crude oil isn’t waiting for the weather: It’s already rallying. After hitting a low of about $26 per barrel in February, benchmark West Texas Intermediate (WTI) has climbed back to $40 per barrel. Many analysts attribute the price appreciation to recent talk from OPEC and other big oil-exporting countries about a possible production freeze to tackle the output surplus that has been weighing on oil prices for almost two years.

We had been expecting a bit of a rebound for oil, figuring that WTI would return to a trading range of $35 to $40 per barrel sometime this spring. But we wouldn’t rule out yet another price plunge at some point. Even if OPEC, Russia and other oil exporters agree to keep their output steady, global production will continue to outpace global demand. And while output in the U.S. is starting to decline, the drop has been small so far. So crude continues to pile up in storage.

Until oil inventories start dropping, WTI will struggle to mount a sustained rally. If stockpiles keep growing, the same fears stalking the natural gas market about running out of storage space could infect oil traders, too.

Will the next SCOTUS nominee determine the fate of the Clean Power Plan?

The Obama administration’s Clean Power Plan is arguably the most significant environmental regulation to come out of Washington in decades. The CPP calls for dramatic reductions in greenhouse gas emissions from the power sector, and has been hailed as proof of America’s commitment to combating climate change. But a rare move by the Supreme Court has halted implementation of the CPP and created significant uncertainty for the future of U.S. energy and environmental policy.

A Rare Stay

It was not surprising that many states brought a legal challenge against the Environmental Protection Agency’s CPP regulations as soon as the rules were finalized. The CPP calls for a 32% reduction in greenhouse gas emissions from the nation’s power plants by 2030 (with 2005’s emissions used as the starting point). That’s bound to require expensive changes, such as closing coal-fired power plants, revving up the use of renewable power and boosting energy efficiency. More than 20 states sued the EPA on the grounds that the agency doesn’t have the legal authority under the Clean Air Act to impose such sweeping changes. (We take no sides on that legal question, or on any of the other arguments over the CPP.)

The surprise came from the Supreme Court, which in a 5-4 ruling ordered the EPA to suspend implementation of the rules until the Court has had a chance to hear the challenge brought by the states. That was remarkable because a lower federal court was still considering the case, and the Supreme Court almost always waits for cases to work their way up to its docket before intervening. Clearly, five of the Court’s justices believed there was a very compelling reason to keep the CPP from going forward before the legal questions are resolved at the highest level.

But now, the rule’s fate before the Supreme Court is in doubt because of the recent passing of Justice Antonin Scalia, who was widely seen as a reliable “no” vote against the CPP. Meanwhile, Senate Republicans seem determined not to consider any nominee President Obama might put forward to fill the vacancy left by Scalia. So what does an eight-justice Court mean for the power plant regulations?

The Road Ahead for the CPP

Don’t expect the Court to end the suspense over the power plant rules anytime soon. Nothing will happen until the U.S. Court of Appeals for the D.C. Circuit hears the challenge brought against the EPA in June and issues its own ruling later in the summer.

According to Patrick Parenteau, an environmental law professor at Vermont Law School, the D.C. Circuit is likely to uphold the CPP. “Overall, it’s a great panel for the EPA” to win its case, he says.

Assuming an initial win for the government, the states challenging the CPP can then ask the Supreme Court to take up the case. But that probably won’t happen until the spring of 2017, says Jeff Holmstead, a former EPA assistant administrator under President George W. Bush and now an attorney with the firm of Bracewell in Washington, D.C.

How might the Supreme Court rule? Both Parenteau and Holmstead agree that the odds of the Court striking down the regs decreased with the death of Justice Scalia. Holmstead estimates that, with Scalia, the challengers had a 95% chance of success, but “how to understand the case has changed” with only eight justices, who could split 4-4.

If the Court is deadlocked, the EPA effectively wins by default. In that scenario, the opinion of the lower court stands, though the decision does not set a legal precedent the way a normal Supreme Court ruling would.

The Political Angle

Whatever the Court does, voters will have a big say on the CPP. The next president will be able to implement the rules as written, modify them or nix them entirely. And it’s a good bet that pretty much any GOP candidate currently in the running would pull the plug on the CPP. Republican front-runner Donald Trump has suggested that he would make big cuts to the EPA’s budget if he is elected president, which certainly wouldn’t bode well for the future of the CPP.

By contrast, Democratic front-runner Hillary Clinton would almost certainly implement the power plant rules as written by the Obama EPA. Moreover, she’d probably appoint a more liberal justice to fill the Scalia vacancy, thereby creating five likely votes to uphold the regulations.

Along with everything else riding on the 2016 election, add in the Clean Power Plan. A GOP victory would render any court decisions moot. A Clinton win would means the regs likely stay in place.

Meanwhile …

Although the Supreme Court stayed the EPA’s hand, progress on the CPP’s goals is continuing. At least five states (California, Colorado, New York, Virginia and Washington) say they’ll voluntarily continue to implement the rule, never mind the Supreme Court’s stay. And, more generally, the carbon intensity of the U.S. power sector (that is, the amount of carbon dioxide produced for each unit of electricity generated) is bound to drop in the near term. Why?

Coal consumption will keep falling, as it did dramatically last year. Based on Department of Energy data for the first 11 months of 2015, we figure that the U.S. burned less coal last year than at any time since the mid-1980s, as utilities dealing with other clean air regulations switched to cleaner burning (and cheap) natural gas. Data on direct coal consumption for 2016 aren’t available yet, but statistics from the Association of American Railroads show that trains hauled 27% less coal this past February than they did in February 2015. In January, the year-over-year drop was 33%. This strongly suggests that coal consumption is still plummeting after a very weak 2015.

And renewable power generation continues to soar. The Department of Energy expects about 26 gigawatts of generating capacity to come on line this year, based on announcements from utilities. Solar leads the way with about 9.5 gigawatts of utility-scale projects, three times the amount installed last year. Natural-gas-fired plants rank second, with 8 gigawatts of planned capacity, followed by wind turbines at 6.8 gigawatts.

The bottom line: A rising share of generation will come from low- or zero-emission sources, which is more or less what the CPP aims to achieve.

Who profits from the Apple vs. FBI showdown?

In this issue: How the standoff between Apple and the FBI spells more business for security firms. Growing threats from phony e-mails. Cellular firms betting heavily on 5G networks as their next cash cow. AT&T and Intel testing wireless airwaves for drones. How good is your state for tech innovation? Facebook’s new global telecom project. Good stock picks in the Nasdaq for dividend hunters.

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