After many years of stability and relatively low prices, the natural gas market has taken a turn towards volatility and skyrocketing rates. Consumers should be aware of these recent changes and take action to mitigate the risks associated with an unsteady, high-priced market.
National Gas Intelligence’s recent episode of their Hub and Flow podcast featured 7 contributors to the recent volatility in the natural gas market. Domestic politics, international unrest and weather conditions all play a factor in this crazy rollercoaster of a market. Here I’ll summarize the overall contributors to this volatility as laid out by National Gas Intelligence.
7 Contributors to Natural Gas Market Volatility
- Service Cost Inflation: The land day rates for rigs are up, and service equipment is sold out. Producers are not motivated to put out capital in a high-priced gas market when they can simply make more money because of the current conditions. Many producers cannot add rigs or even repair rigs because of supply chain issues.
- Producer Discipline: Producers are in a capital conservation mode. Two-thirds of producers are public companies, who have to answer to stockholders and look good on Wall Street. There is little to no anticipated new drilling or production to help drive prices down.
- LNG/Global Gas Markets: Global politics and conflicts, especially in Ukraine and Russia, are increasing global demand for Liquefied Natural Gas (LNG). The US has been the largest exporter of LNG in 2022, now supplying LNG to customers globally, not just to the USA. Power demand accounts for 30% of gas usage and 1% of LNG demand, and by 2030 these percentages will be equal. The US market is quickly becoming more intertwined with the world market.
- Power Generation: Renewable energy is a high priority for many counties, but switching to cleaner fuels too quickly has proven to be a problem. The impact of retiring coal plants adds pressure on natural gas fueled plants, helping to further drive up prices. Coal burn is now at a 10 year high, due to the dramatic rise in natural gas prices.
- US Legislation: The Inflation Reduction Act (IRA) allows for more drilling on federal lands, but public companies have to be willing to allocate capital. The recent political climate in the US has not been favorable to traditional fossil fuels, which may discourage investments in this sector. The IRA also has tax considerations that that need to be taken into account going forward, which may lead to publicly-held energy companies being more conservative when allocating capital to new projects.
- Recession Fears: The odds of recession over next 12 months is currently estimated to be about 50%, which is up significantly from 15% in December 2021. A mild recession may bring demand back in line with supply, but in a deep recession all bets are off.
- Weather/Storage: This may be the biggest impact on market currently. US storage is 367 BCF below the 5 year average, with time running out on the injection season. Recent production losses at Freeport LNG have been partially rectified, freeing up 2 BCF/day to increase supply but other LNG plants also opened up more operations when Freeport went down.
Long story short, we are seeing a natural gas market that we have never seen before. Domestic prices are increasingly becoming linked to global affairs and are largely affected by legislation, weather, and power generation. Until recently, consumers may have felt more comfortable knowing that natural gas prices would be largely predicable over the coming months and even into the winter, but this year the market is quite volatile and risky.
Energy consumers are advised to speak with their UGI Energy Services representative to discuss what risk-mitigation strategies will work best for their organization. Customers who are on a market-based or indexed pricing plan are encouraged to look into locking at least some portion of their energy needs.
The sooner you act, the better. Risk mitigation options will be few and far between the closer we get to the winter season.
About the Author
With more than 10 years of experience in the energy industry, Aaron Lovenworth knows the ins and outs of the energy industry. Aaron has a 94% retention rate for his book of business. Once a customer signs on with Aaron, they stay with Aaron and UGI, whether it be for natural gas or electric supply. Aaron uses a simple formula for his book of business: develop relationships, understand his customers’ priorities, provide annual savings, and advise when to lock in rates.