The era of cheap natural gas might be gone for good. U.S. natural gas futures climbed to a 31-month high of 4.16/MMBtu on Thursday thanks to forecasts for hotter weather over the next two weeks and soaring global gas prices ensuring that U.S. liquefied natural gas (LNG) exports will remain at record highs.
Refinitiv has projected that average gas demand, including exports, will climb from 90.9 bcfd in the current week to 94.5 bcfd next week as cooling demand keeps rising. Next week’s forecast is actually lower than anticipated because some power generators will be forced to burn coal instead due to increasingly high natural gas prices.
But that won’t be on a big enough scale to stop the natural gas march.
And that’s great news for U.S. LNG: Between January and June 2021, U.S. LNG exports jumped by 42% Y/Y to an average of 9.6 billion cubic feet per day (Bcf/d), compared with the first half of 2020. Asia remained the top buyer of U.S. LNG, accounting for 46 percent of exports through the end of May.
Short-term outlook: Supply Crunch
According to a report in the Financial Times, natural gas prices have climbed sharply across Europe and Asia thanks to tighter supplies, lower production volumes in Europe, as well as lower exports from Russia.
Consequently, natural gas prices in Europe have surged to around 40 euros per mWh (~14/MMBtu) for the first time ever, with UK gas prices at the highest levels in 16 years. The situation is even direr in Asia where gas prices have hit $15/MMBtu
The supply crunch is only expected to intensify over the coming weeks.
“If anything it’s surprising there hasn’t been more concern. In terms of additional supply there aren’t many options on the table globally. Russia is really the only discretionary source of supplies out there but we don’t know when additional deliveries might start. So traders around the world, from Japan to Brazil, are starting to watch European prices too,” Tom Marzec-Manser at ICIS has told FT.
Natural gas demand has rebounded strongly across the globe in part due to economic recovery as economies reopen but also due to a spate of extreme weather events. A long winter in Europe as well as droughts in places like Brazil have elevated natural gas consumption.
The bullish short-term outlook could, however, come under pressure.
Last week, the EIA recorded a 32 Bcf injection, above the five-year average of 30 Bcf. Estimates for the current week vary widely from as little as 14 Bcf to one as large as 34 Bcf.
Long-term outlook: The Natural Gas Bridge
The United States has a long-running love affair with natural gas, with fossil fuels acting as the lynchpin in the country’s power generation mix, while nearly half of American homes use the fuel for heating. With the transition from fossil fuels to renewables in full swing in many states, natural gas serves as the bridge that will make the switch smoother and less jarring.
Indeed, natural gas and LNG are now being viewed as the bridge in the transition to renewable energy thanks to their more favorable emissions profile, as it generates 30% less carbon dioxide than fuel oil and 45% less than coal.
And, this is very likely to become a long-term trend.
Whereas a combination of several short-term tailwinds such as supply disruptions, the global economic rebound, and a pause in new LNG export plants have been driving the natural gas rally, there is a growing consensus that structural changes led by the clean energy transition mean that this is likely to become the new norm.
To exacerbate matters, investments in new gas fields have been falling over the years amid calls from climate-conscious investors and governments. For instance, high carbon prices in Europe are forcing utilities to quickly switch to natural gas; China is ready to be more reliant on gas than ever, while scores of governments in South and Southeast Asia are planning dozens of new gas plants to meet rapidly growing electricity needs. Further, the switch to natural gas can be made relatively quickly with limited capital deployments.
With few other viable options, the world will continue to rely more heavily on cleaner-burning gas to help achieve short-term green goals.
“No matter how you look at it, gas will be the transitional fuel for decades to come as major economies commit to meeting carbon emission targets. The price of gas is more likely to remain high in the medium term and increase in the long term,” Chris Weafer, CEO of Macro-Advisory Ltd., has told Bloomberg.
Indeed, natural gas is the only fossil fuel that’s expected to record significant growth in the current decade, with demand forecast to increase 7% from pre-Covid-19 levels by 2024, according to the International Energy Agency. LNG demand, in particular, is expected to remain strong, with LNG demand forecast to grow 3.4% annually through 2035, according to an analysis by McKinsey & Co.
A lack of capital investments, however, means that natural gas supply is likely to remain tight. For instance, few new LNG export projects have been approved since early 2020, save for a massive expansion in Qatar. Meanwhile, Saudi Arabia has planned to develop the giant Jafurah gas field, but a good chunk of that gas is likely to end up in its green hydrogen project.