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Capital Markets

US to get some fracking support

The boom in US shale-gas production is likely to support its gas exports, economy and dollar

Judging by the amount of coverage and market reports on shale gas this month, the revolutionary form of gas – extracted through the hydraulic drilling of rocks, using jets of water to unlock trapped gas; or fracking to be precise – is still the game changer for the US gas markets.

The discovery and extraction of shale gas has, indeed, transformed the US gas markets, because when the amount is combined by the level of liquified natural gas (LNG) that is shippable, there is a glut of gas keeping prices down.

Interestingly, according to the US Energy Information Administration (EIA) spot natural gas prices dipped to a two-year low in November as:

US domestic marketed production averaged 65.4 Bcf/d through September, based on Energy Information Administration (EIA) data, an increase of about 7% from the same period in 2010, while demand for the corresponding period was up 2% this year.

Also, as demonstrated by the following chart from the US's EIA:

Spot Henry Hub natural gas prices
dollars per million British thermal units 
Source: U.S. Energy Information Administration, based on Bloomberg.
Note: Data included through November 30, 2011. 

Data from the Paris-based International Energy Agency also highlights the glut of gas that the US possesses:

In the United States, the shale gas revolution – already in full swing – continues. As domestic gas drives out imported LNG, North America is a segmented “island” market where low prices stimulate demand, especially in power generation and the chemical industry

While others have focused on the US's step to energy independence, this glut will no doubt revolutionise the US economy – well, that’s at least what market analysts are predicting.

According to analysts at UBS Investment Research: 

The US current-account deficit has long been a drag on the dollar. But new technological developments that allow the country's vast shale gas reserves to be commercially exploited suggest energy imports may fall sharply over the next few years. That would significantly improve America's balance of payments and the long-term outlook for the greenback.

If the US can continue to move towards energy independence and rely on more gas-fuelled constructions, the dollar will strengthen over time.

UBS analysts say that:

If America’s net energy position improves significantly with the commercial exploitation of shale gas, then the dollar is likely to break its relationship with oil. Indeed, in the 1990s, rising oil prices were associated with a stronger dollar as America ran a much lower net oil deficit - compared to other regions like Europe and Japan.

- Euromoney Skew Blog

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