The natural gas market has seen a significant upturn this year, benefiting from robust storage levels and stabilized prices following the sharp spikes of 2022. Despite these positive developments, challenges such as volatile pricing, seasonal demand fluctuations, and supply-demand imbalances continue to pose obstacles. The emergence of renewable natural gas (RNG) and LNG export projects reflects the ongoing structural shifts in the dynamic energy landscape of North America. Industry experts are predicting a 5% compound annual growth rate (CAGR) for the North American natural gas market between 2022 and 2027, primarily driven by increasing industrial demand from sectors such as refining, petrochemicals, and fertilizers.
Winter 2024 is approaching, prompting questions about the factors that will drive North America’s natural gas markets. In addition to production levels and storage capacity, the market is influenced by power market trends, LNG exports, imports, and changing weather patterns. But which of these factors will play the most critical role in the upcoming season? Let’s delve into the findings from Wood Mackenzie.
Changing weather conditions have a significant impact on the natural gas market, directly influenced by climate change. Cold snaps not only spike demand but also disrupt supply. Freeze-offs, where water or liquids in gas wells solidify and block production, are a recurring issue in North America. Historically, these events have reduced about 0.7% of Lower 48 output during winter, with losses varying based on location and intensity of the cold. These disruptions are particularly critical as they coincide with peak demand periods.
LNG exports are driving growth in the U.S. gas market, with projects like Venture Global’s Plaquemines in Louisiana and Cheniere Energy’s Corpus Christi expansion boosting capacity. However, this surge in exports can constrain domestic gas supplies, especially during periods of high demand. For instance, natural gas inflows for LNG exports dropped from 15 billion cubic feet per day (bcfd) to 7 bcfd to meet local needs during severe cold in January. This shortage led to price spikes, with Henry Hub prices reaching $13, and some regions experiencing even higher increases. LNG exports are increasingly serving as “synthetic storage,” balancing supply when stored gas falls short.
North American natural gas producers are making proactive decisions to manage supply, with companies like EQT and Expand Energy adjusting supply based on market prices. Techniques such as delaying the activation of new wells or turning existing wells on and off can effectively transform gas production into “synthetic storage.” Despite the adoption of these strategies, market unpredictability is expected to persist this winter.
Demand for natural gas in electricity generation has become more unpredictable, influenced by factors such as the retirement of coal plants, low gas prices driving coal-to-gas switching, and an overall increase in power load. Power generation during summer reached a record high of 58 bcfd of gas, surpassing 50% of total U.S. production. Last winter, demand peaked at a record 44 bcfd, reflecting a year-round trend. However, renewable energy plays a crucial role in the power sector, with fluctuations in solar and wind power availability increasing reliance on natural gas during extreme weather.
Storage capacity serves as a buffer during periods of high demand or low supply, but recent years have seen limitations in storage capacity. Narrow summer-winter price spreads have discouraged the commissioning of new storage facilities, resulting in storage capacity falling short of market needs. The demand for stored gas remains high during peak winters, leading to significant withdrawals. The “days of cover” metric, measuring storage relative to demand, remains low during cold periods, raising concerns about supply.
The North American natural gas market has experienced significant price volatility due to storage-related challenges. Despite a 10% surplus in storage inventories compared to the five-year average, long-term storage capacity lags behind market expansion. Currently, U.S. storage covers only 25 days of full demand, a historic low. Without substantial expansion, volatile prices are likely to persist in the future.
While the challenges facing North America’s gas market are evident, opportunities for growth and transformation are also present. Natural gas is expected to play a vital role in replacing coal and integrating renewables into the energy mix. Ongoing and upcoming projects aim to expand capacity and address issues related to price, demand, and supply of natural gas.
Renewable Natural Gas (RNG) has emerged as a promising tool for decarbonization, with growing production supported by policies like California’s Renewable Gas Standard. Demand-side contracting is expected to gain traction in 2024, particularly in hard-to-decarbonize sectors and heavy-duty transportation. Companies like Walmart and UPS are already testing RNG-powered fleets, signaling a shift towards sustainable fuel solutions.
The North American gas market is eagerly anticipating the upcoming LNG export projects, driven by rising U.S. and Canadian gas production and record storage levels. While the timelines for projects like Plaquemines and Golden Pass are known, the impact of this new demand surge remains uncertain. Forward price projections indicate potential premiums when this demand materializes, despite recent discouragement in production growth due to low gas prices.
In conclusion, the North American natural gas market faces both challenges and opportunities as it navigates a changing energy landscape. With a focus on addressing supply concerns, embracing renewable energy solutions, and leveraging LNG exports, the market is poised for growth and transformation in the coming years.
