Another wild year awaits U.S. natural gas as the insularity that once shielded American energy consumers from turbulence abroad disintegrates.
Benchmark U.S. gas futures surged nearly 45% in 2021, the highest annual return in half a decade, after a deadly frost that crippled production was followed by summer heat waves that lifted demand and hampered efforts to store supplies for the winter.
As 2022 dawns, traders, explorers and utility operators face the prospect of continued volatility amid growing competition from buyers as far away as Poland and the Netherlands, which are grappling with a crisis so acute that factories have shut and Goldman Sachs Group Inc. is warning there is a “clear risk of running out of gas.”
Foreign buyers bought 13% of U.S. gas production in December, a sevenfold increase from five years earlier, when most of the infrastructure needed to ship the fuel out of the country wasn’t yet in place. Before the advent of the U.S. gas export business, the U.S.-Canada market was a provincial sphere where prices were dictated by cold snaps in places like Pittsburgh and Chicago, and hurricanes in the Gulf of Mexico.
But those days are behind us, as brokers in Seoul and Rotterdam shell out record amounts to lure tankers loaded with U.S. gas.
“We continue to expect more price volatility in these markets relative to recent history, albeit at a more subdued level once you get out of the peak winter weather demand season,” said Natasha Kaneva, head of commodities research and strategy at JPMorgan Chase & Co. “This is especially true in the U.S., where price volatility has been absent for a long time.”
Volatility in New York-listed gas futures spiked in early December to the highest level in nearly three years, as late-fall concerns that the U.S. was on the verge of its own supply crisis collapsed due to milder-than-normal weather and prices plunged more than 40% from their October peak. Prices have also fallen recently in Europe as the arrival of US cargoes has eased fears of an immediate shortage, although continental European buyers are still paying six times more than their US rivals.
Anxiety has not entirely evaporated, given that the coldest months of winter in the northern hemisphere still lie ahead.
As of December 30, nearly 50 tankers carrying U.S. LNG were heading to Europe, with destinations as varied as Gibraltar, Turkey, Croatia and Poland.
This is an impressive 77% increase over the previous week.
2021 “was a banner year” for gas, said Paul Phillips, senior strategist at Uplift Energy Strategy in Denver. Despite expectations of continued volatility, the past year “will be hard to beat.”
Concerns about climate change have some observers warning of the potential for increased summer volatility. “We’ve definitely seen a warming pattern,” said Dennis Kissler, a trader at Bok Financial Securities. “The mid-summer months have the potential to be very volatile if the summer is warmer than normal.”
“We continue to expect more price volatility.”
One of the foils for another year of volatility would be a significant jump in domestic gas production, analysts say. Bank of America forecasts a 3.5-cfm increase in daily production this year, driven by new wells in shale fields from West Texas to Pennsylvania. U.S. gas production, excluding Alaska, rose about 7% in 2021, more than erasing the pandemic-related decline of 2020.
Daily production may touch a record 100 billion cubic feet this year, threatening to flood the market with more gas than it can burn, said John Kilduff, co-founder of Again Capital LLC.
In a “well-supplied” market, futures traded in New York would average $3.45 per million British thermal units in 2022 and $3.10 the following year, Bank of America said in a note to clients.
That compares with a December average of just under $4.
“The key word will be volatility,” Kilduff said. “We’re going to be back to oversupply” in 2022.
