July 18, 2022
Volatility in the Market – What You Need to Know
Does the volatility in the current natural gas market leave you wondering “Why is this happening?” and, more importantly, “How will it impact me?”
We know there is a lot happening right now, and in this article, we will help clarify the key points so that you can better understand the situation and how it affects your natural gas price.
Russia and the Global Energy Crunch
Russia’s invasion of Ukraine interrupted energy markets worldwide. There were already causes for concern in the natural gas supply chain (which we’ll explain in the next sections), but the invasion and subsequent events forced natural gas into the international limelight.
As countries worldwide started imposing sanctions and refusing to buy their exports, it also became clear that pipelines could be taken offline for a variety of reasons. For instance, pipelines could be damaged during warfare or shut down intentionally in retaliation for backing Ukraine. Either scenario is a big problem because Europe needs Russian gas.
Until now, Russia supplied Europe with 40% of its natural gas, and an even higher percentage to countries like Germany. This gas is used for heating and cooking, as well as power generation for large industries. Thus, a cutoff in the gas supply to Europe would be detrimental to these countries and would be felt at all levels of society.
The uncertainty of whether gas would continue to flow from Russia sent the international markets into a frenzy. As Europe tries to shore up its natural gas reserves in preparation for winter, the overseas demand for natural gas sent prices skyrocketing.
Now, as the Nord Stream 1 pipeline is shut down for planned maintenance, there is growing concern that the closure may be extended due to the Ukraine war.
Weather and Fuel Diversity
In addition to the increased demand from overseas, we also face uncertainty in our domestic supply and demand.
The south and west are facing extreme heat waves this summer, placing an increased cooling demand on the grid. Large weather events, such as a hurricane in the Gulf of Mexico, could threaten both the production and delivery of gas. And as we round the corner into fall and eventually winter, demand will again increase as temperatures drop and the demand for heating increases.
These weather events aren’t new to us. We’ve seen them before, and we’ll no doubt see them again. One of the newer challenges, however, stems from a lack of fuel diversity.
Where fuels such as coal had been used to relieve stress in the energy markets during previous shortages, the closures of several plants now leave the US with fewer backup options to help support the system.
Lower Than Average Supply
While the US is in a much better supply position than our international counterparts, we are nonetheless experiencing lower than average gas inventories, as shown in the graph.
The US started the year with a significant storage deficit, due in large part to the long winter which caused an increase in heating usage (see chart). Since then, international events have also reverberated in the US.
In response to the increased overseas demand, the US has been increasing its exports of liquified natural gas (LNG in natural gas that has been cooled to a liquid state that can be more easily transported overseas).
As companies divert gas to LNG to take advantage of the international market opportunities, our domestic supply is then tightening even further.
One reprieve from this was the unfortunate explosion at the Freeport LNG facility last month. While the facility is making repairs, two billion cubic feet (Bcf) of natural gas is off the market until this fall at the earliest, helping to loosen demand and stabilize our domestic market.
This growth in LNG exports will continue to impact our domestic natural gas prices regardless of Russia, leaving us more vulnerable to geopolitical events.
LNG is just one piece of the puzzle. The production of dry natural gas continues to increase but is not keeping up with demand.
A downturn in the industry and the pandemic environment took out the fracking crews. We are now in a position where we don’t have the number of rigs nor the people to staff them at a sufficient rate needed to keep pace.
Inflation and worries of recession are playing a role in our supply challenges as well. In the current climate, there is a lessened willingness of people to finance oil and gas exploration, as well as constraints on existing producers. Companies are incented on profitability, staying cash flow positive, and giving back to their shareholders. This further restricts the amount of increased production that can come on at any time.
Look for Opportunities of Certainty
As domestic and international events continue to unfold, our natural gas prices will continue to fluctuate. This volatility in the market can be worrisome and unfortunately, it’s not going away any time soon.
However, in times of uncertainty, one of the best things you can do is look for opportunities that you can control, such as locking in a price for your future natural gas needs. If you would like to explore options on fixed pricing, give us a call or contact your sales representative.
We are passionate about helping small and mid-size companies save money and manage risk and are here for you no matter what the market brings tomorrow.