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The Future of Fracking

The future of fracking may come down to the two runoff Senate elections in Georgia. As natural gas rallied into the election, get Andrew Hecht's thoughts on the future of the commodity in the meantime.

The United States went to the election polls on Tuesday, November 3, and energy production was on the ballot. President Trump had been a consistent advocate for energy independence, supporting a drill-baby-drill and frack-baby-frack policy. Regulatory reform under his administration helped catapult the US to a leadership position in production.

Democrats support lowering US dependence on fossil fuels. While the progressive wing of their party advocates for an immediate end to producing and using hydrocarbons and a “Green New Deal,” more moderate Democrats are looking to phase out fossil fuels over time. It took decades for the US to produce enough oil and gas to move away from dependence on the Middle East.

The candidates for President debated over the future for fracking. President Trump argued that the Democrats’ plan hands the power of production back to OPEC and Russia and would cost states like Texas, Pennsylvania, and Oklahoma jobs and economic growth.

Massive reserves of natural gas in the Marcellus and Utica shale regions of the US and technological advances in extracting it from the earth’s crust, together with regulatory reforms, pushed the price of natural gas lower. Replacing coal with natural gas and exporting LNG via ocean vessels increased the energy commodity’s addressable market.

Natural gas had been rallying going into the election last Tuesday. The United States Natural Gas Fund (UNG) tracks the price of NYMEX futures higher and lower on a medium-term basis. The BOIL and KOLD ETN products are bullish and bearish short-term tools.

Massive reserves and a burgeoning export business

Necessity is the mother of invention. In the natural gas market, quadrillions of cubic feet of the energy commodity in the Marcellus and Utica shales caused new demand verticals to emerge. Natural gas replaced coal for power generation in the US over the past years. Processing gas into liquid form for export worldwide created a growing export business of the energy commodity.

The uses of natural gas continue to grow as the demand side of the fundamental equation balances the increased supplies. In a vote of confidence for the future of the natural gas market, value investor Warren Buffett’s Berkshire Hathaway (BRK.B) purchased transmission and pipeline assets from Dominion Energy (D) for $10 billion in cash and assumed debt in a deal announced in early July 2020. The acquisition increased Berkshire’s exposure in all interstate US natural gas transmission from 8% to 18%.

Warren Buffett made a wager on the future of natural gas before the US election that could have changed the dynamics for the business.

The election results are not conclusive for energy

Like almost everything in 2020, last week’s presidential election turned out to be a highly contentious affair. Despite pollsters’ projections of a blue wave, the Republicans picked up some seats in the House of Representatives. The race for the White House was close, with razor-thin margins in some of the swing states, but challenger Joe Biden became the President-elect on November 7. Demands for recounts and lawsuits could remain in the courts for weeks. The turnout was enormous, and the results were a sign of the vast political division in the United States. The future majority of the Senate will come down to a pair of run-off elections in Georgia.

The Georgia Senate contests could determine the future of natural gas and energy production.

The frack or not to frack, to regulate or not to regulate, those are the questions

A few seats and votes in a Republican-controlled Senate would likely prevent progressive Democrats from achieving their goals of banning or limiting fracking. A sweep in Georgia could pave the path for the progressive wing to push the new President towards a dramatic shift in energy policy. The regulatory environment is likely to become stricter under President Joe Biden, how strict could be in the hands of voters in Georgia.

After rising to the highest price since January 2019, when nearby natural gas futures reached $3.396 per MMBtu in late October, the price turned lower last week despite an early end to the 2020 injection season.

Source: CQG

As the weekly chart highlights, natural gas was trading at just under $2.90 per MMBtu at the end of last week. Last Thursday, the Energy Information Administration reported its first withdrawal from storage of the 2020/2021 winter season for the week ending October 30. Stockpiles do not typically begin to decline until mid-November. The price fell despite the early end of the injection season.

Meanwhile, the 2020 peak in inventories going into the high demand season this year stands at 3.955 trillion cubic feet, 223 billion cubic feet higher than last year’s higher. Last year, natural gas experienced downside pressure because of the high level of stocks. Moreover, the second wave of coronavirus and its effect on the demand for energy means that there are plenty of supplies to meet all winter months’ requirements.

Despite the withdrawal, the high level of inventories likely weighed on the price of natural gas over the past week. When it comes to US energy policy, watch Georgia as the future could be in the hands of the Peach State.

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UNG shares fell $0.05 (-0.45%) in after-hours trading Tuesday. Year-to-date, UNG has declined -33.51%, versus a 11.58% rise in the benchmark S&P 500 index during the same period.



About the Author: Andrew Hecht

Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles.

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