Fossil Gas: Wild Price Swings With No End in SightMarch 15, 2023
Above, Henry Hub prices reflect US prices for Natural gas, but regional swings may vary wildly.
For bean counters, wild fluctuations are as intimidating as higher absolute costs. Gas has been historically volatile, and fracking’s rise has not changed that. The war in Ukraine is only one example of pressures being felt in gas markets.
One more reason why move to renewables is accelerating.
Last time I looked, sun, wind, still free.
Wall Street Journal:
Homeowners and businesses across the country have seen their gas bills go wild—and the turbulence isn’t going to calm down anytime soon.
Last year was the most volatile on record for natural gas, boosting the cost to heat homes, generate electricity and manufacture economic building blocks such as fertilizer and steel. Prices in 2022 whipsawed from unseasonable lows to shale-era highs and back again. Benchmark gas futures, which determine what millions of Americans pay for heat and electricity, swung by at least 7% on 44 days last year, the most since at least the early 1990s, when gas markets were deregulated and the modern trading era began.
The wild ride has continued this year, with 12 daily moves of 7% or greater. On many days, traders find it difficult to determine why prices move so sharply.
Analysts, traders and big gas buyers expect this kind of instability to become the norm. Coal-fired power plants have been retired en masse without wind and solar farms ready to replace their output, pressuring utilities to pay up for gas. Infrastructure to export more gas is being built, but pipeline projects to move more gas within the country have been slowing.
The Kremlin’s invasion of Ukraine last year sent global markets haywire, sparking a scramble by European buyers to replace Russian supplies and tethering U.S. prices to international events even more. On Wall Street, trading programs that follow the price trends have come to dominate commodities exchanges, amplifying moves up and down. The algorithms can add momentum to shifts in the market by flipping large chunks of investors’ positions on any given day.
The severe swings diverge across regions. This winter, gas prices in California surged to more than six times the national benchmark price at the time. A fire at an important export facility in Texas kept traders guessing about supply and demand. Unusually warm weather cut heating demand in parts of the country this winter and knocked prices in February below a threshold rarely breached over the past 20 years.
Plummeting gas prices in February pulled down U.S. energy costs from January and helped cool overall inflation, the Labor Department said Tuesday. Now, drillers are throttling back production to buoy prices, though analysts warn that could set the stage for spikes if summer is particularly hot.
Policy decisions from the White House to state capitols have exacerbated the situation. States have blocked and discouraged new pipeline construction and hastened the closure of coal-fired power plants, while federal officials have said they would boost gas exports to support U.S. allies, particularly in Europe.
This wasn’t the promise of the shale boom of the 2000s, which was supposed to provide inexpensive, reliable supply. The seesawing market is “not where most folks in the industry expected us to be,” said Anna Sommer, who analyzes utilities’ energy plans at consulting firm Energy Futures Group.
While warm temperatures in January from St. Louis to New York sent benchmark prices on their steepest monthly plunge since 2001, some Americans paid more than ever for heat and electricity. Many others can expect future bills from utilities trying to recoup billions spent on gas.
In Colorado, Emily Hodge was shocked by a nearly $918 bill for heating and electricity in December, almost double from a year earlier. A cold snap before Christmas pushed prices at a trading hub in Wyoming to $53 per million British thermal units, according S&P Global Market Intelligence, roughly nine times higher than the spot price at a Louisiana pipeline junction where national rates are set.
In January, Ms. Hodge’s bill ticked even higher—to about $959.
UPDATE: Reuters story adds depth.
Reuters:
A flood of liquefied natural gas (LNG) export projects due online worldwide in mid-decade will vie against lower-cost renewable energy and a revived nuclear power sector, which could rock gas prices and hurt some proposed projects, analysts say.
Proposed and approved new LNG plants would boost LNG supply by 67% increase to 636 million tonnes per annum (mtpa) by 2030 from 2021 levels, potentially saturating the gas market.
“There’s over a trillion dollars of natural gas infrastructure being built in the world today. There’s a set secular shift and natural gas that is here to stay,” said Jack Fusco, CEO of LNG exporter Cheniere Energy at a conference in Houston last week.
In Qatar, a massive LNG expansion project will add 49 mtpa by 2027. U.S. projects could add 125 mtpa (16.4 billion cubic feet per day) of capacity by late 2027, according to data compiled by BTU Analytics, a FactSet company.
In a taste of the potential volatility those projects might face, LNG prices last year soared on European demand, then slid as storage filled and customers pushed back against the high prices and switched to other energy sources.
That shift is only going to accelerate. In 2021 alone, wind and solar’s share of global power generation jumped to more than 10% from just 1% a year earlier, climate think tank Ember estimates.
At the same time, nuclear is rebounding: Japan aims to boost nuclear’s share of its power to at least 20% by 2030 from less than 7% last year. France is proposing to build six nuclear reactors by 2035.
Analysts see LNG prices remaining strong until around 2027, but after that they may fall as the demand outlook is hazy.
“One big uncertainty the industry is focused on is how much damage the high prices has done to medium-term gas demand,” said Michael Stoppard, who leads global gas strategy at S&P Global.
S&P Global pushed back its demand growth outlook for LNG from emerging markets by two years due to the spike in prices.
LNG has “acquired a reputation as a costly and unreliable fuel” that could jeopardize plans to build new import terminals in Asia, the region with the highest demand outlook, the Institute for Energy Economics and Financial Analysis said in a report last month.
China cut its LNG purchases by 20% last year on COVID-19 curbs and price volatility. India, Pakistan and Bangladesh also slashed combined LNG purchases by 16% last year, IEEFA said.
n the U.S., gas markets saw a volatile start to the year after a relatively mild northern hemisphere winter and higher LNG prices which led to conservation sent U.S. prices below the cost of new production and led to a retrenchment in drilling.
Muqsit Ashraf, who leads Accenture Strategy, expects solid demand to support LNG prices through around 2027.
“What happens after that is more of a debate and depends on how investment decisions play out this year,” said Ashraf, who previously headed Accenture’s global energy practice.
Baker Hughes (BKR.O), a major LNG equipment supplier, warned in January that cost inflation and higher interest rates had slowed the pace of LNG final investment decisions.
Still, it anticipates “significant growth” in project approvals this year. The year’s first came on Monday, with Venture Global LNG authorizing the second-phase of its 20 mtpa Plaquemines LNG project.
The risk is projects will come online just as demand growth slows and hit global LNG prices.
“When you hear people say ‘there is no way we will overbuild this,’ that’s when things get over-built,” said Alan Armstrong, CEO of U.S. gas pipeline operator Williams Companies which supplies gas to LNG exporters.
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