Greetings:

Congress throws the energy world some year-end curveballs. And are natural gas traders forecasting a change in the unseasonably warm weather that has been entrenched across the Eastern U.S. this season?

Energy Policy Changes

Where did that come from? In the waning days of 2015, lawmakers managed to agree on not one, but two major energy policy changes: Provisions lifting the 40-year-old ban on exporting U.S. crude oil were included in legislation to keep the federal government funded. The legislation also included an extension of the tax credit for renewable energy systems that was scheduled to expire at the end of 2016.

Nixing the ban on crude exports is a major win for the U.S. oil industry, and one that we frankly didn't think would happen this year. Sure, the House of Representatives had passed a bill OK'ing exports this fall. But the White House was steadfastly opposed, so we figured any deal would have to wait. (Continued below.)

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Suddenly, American energy firms have unfettered access to world oil markets. Though still an importer of oil, the U.S. is producing lots of light, sweet crude that many refiners overseas prize. As production climbed in recent years, benchmark West Texas Intermediate (WTI) crude traded at a discount to Brent, the primary global crude benchmark, since WTI oil was largely trapped within the lower 48 states. In the wake of the ban being lifted, WTI and Brent have converged as markets anticipate the freer flow of oil across borders.

But the policy shift probably won't have a major impact on U.S. energy firms in the near term. World oil markets remain oversupplied, even as Iran gears up to start exporting more oil once Western sanctions on its oil industry are lifted. So there probably isn't an urgent need for crude from Texas or North Dakota overseas just yet. And we've heard that shipping out significant amounts of U.S. oil will require some new infrastructure to be built along the Gulf Coast first.

In the long run, look for the flow of oil into and out of the U.S. to increase as producers send more barrels of their light, sweet crude to refiners in Asia, Latin America or Europe, where they are designed to process that variety of oil, and as refineries here bring in more of the heavier, sour grades of crude that they can handle most efficiently. Expect net imports (imports minus exports) to keep declining over time, continuing the trend of recent years.

A Boon for Wind, Solar

Lifting the ban on crude exports wouldn't have happened so quickly without a similar boost for the renewable energy industry. Congressional Democrats and the White House ultimately signed off on the end of the crude ban because they were winning a similarly weighty concession: Extended tax credits for wind and solar power. Originally scheduled to disappear or phase out after 2016, the 30% federal tax credit for solar projects will remain in place through 2019 and then gradually decline. The lapsed producer tax credit for wind turbines was revived and extended through the end of next year.

The new tax policy almost certainly guarantees a lengthy build-out of solar capacity. With the solar credit set to drop off after 2016, we were figuring on a huge rush of building next year as homeowners, businesses, utilities and investors scrambled to qualify for the 30% credit. That would probably have led to a dearth of new projects in 2017. Now, the pace of new installations promises to ramp up steadily, with no sharp peak and no big crash.

A Change in the Weather?

Trying to predict what this volatile winter will do next is almost impossible. But natural gas markets are signaling a cold trend. After plummeting to its lowest level in more than a decade, the benchmark gas futures contract rebounded sharply this week, from less than $2 per million British thermal units (MMBtu) to more than $2.20 per MMBtu. That's still quite depressed, but the recent uptick suggests that traders expect heating demand to perk up. Cities in the Northeast that were basking in the 70s in recent days are now expecting temperatures that are a bit more seasonal.

We wouldn't recommend that investors try to time the gas market, which is certain to remain extremely jumpy. This winter has already seen record warmth, heavy snow in the West and deadly floods and tornadoes in the South. There's no telling what will come next, which will make predicting heating demand for natural gas a challenge.

Still, if the balmiest weather of the season does prove to be behind us, there's a decent chance that the lows for natural gas prices are behind us, too.

Sincerely,

Jim Patterson

jpatterson@kiplinger.com

P.S. Don't hesitate to write me, directly with questions or comments about any of the topics we cover, or anything else energy related. You can find previous issues of Kiplinger's Energy Alerts or Kiplinger's Tech Alerts here.