The U.S. recently jumped into the top spot as the world’s largest exporter of liquefied natural gas (LNG), overtaking Qatar and Australia.
The increase of gas exports comes at a time of tightness in global LNG markets, with American LNG providing supply at a time when certain importing markets, particularly in Europe, are looking for cargoes. However, as more U.S. natural gas is diverted overseas, low prices may become a thing of the past.
U.S. LNG surges
U.S. LNG export capacity has increased steadily since the first phase of Cheniere Energy’s Sabine Pass facility came online in 2016. For the first time ever, the U.S. exported the most LNG in the world for the month of December. Qatar and Australia may overtake the U.S. on volumes depending on the month, but by the end of 2022, two additional projects will come online – Sabine Pass’s Train 6 and Calcasieu Pass LNG – which will mean the U.S. will hold the largest spot in terms of capacity as well.
Additional cargoes hit the market at a time when Europe is looking for gas. Low levels of gas in storage have resulted in a spike in prices, while a global surge in commodity prices related to pandemic disruptions also pushed up energy costs.
Low levels of gas in storage have resulted in a spike in prices, while a global surge in commodity prices related to pandemic disruptions also pushed up energy costs.
In December, European buyers snatched up 13 percent of all U.S. LNG, with Europe outbidding customers in Asia, forcing some ships to change course while in transit. Bloomberg noted that a “flotilla” of LNG cargoes were heading for Europe in late December, helping to ease sky-high prices. From mid-December until early January, natural gas prices at a key Dutch hub fell by more than half as mild weather set in and LNG cargoes arrived.
“[R]obust LNG imports into Europe, estimated to be around 7.3 million tonnes in December 2021, have partially offset the rapid depletion of storage, at least for the time being,” Rystad Energy senior analyst Wei Xiong said in a statement on January 5.
Still, volatility is a defining feature of today’s gas market. Prices surged again this week on news that gas flows from Russia were lower than expected. For months, Russian gas flows to the continent have been somewhat reduced, and many analysts suggest that Russia is applying pressure on European policymakers to expedite the approval of the Nord Stream 2 pipeline, which may not occur until later this year.
Cheap natural gas gone?
Increased gas exports from the Gulf Coast may be a welcome development in Europe, but as more gas gets exported abroad, American consumers will end up paying more.
Increased gas exports from the Gulf Coast may be a welcome development in Europe, but as more gas gets exported abroad, American consumers will end up paying more.
For much of the past decade, Henry Hub prices traded below $3/MMBtu, and at times, even below $2/MMBtu. Beginning in mid-2021, prices began to shoot up. By the third quarter, Henry Hub was regularly above $5/MMBtu, and briefly surpassed $6. Prices have since retreated as much of the Lower 48 saw above average temperatures this winter, diminishing heating demand. Still, spot prices have bounced around between $3.50 and $4 over the past month.
In the first six months of 2021, U.S. LNG exports averaged 9.6 billion cubic feet per day (Bcf/d), a 42 percent compared with the same period in 2020. In December of last year, the same month that saw the U.S. emerge as the world’s top LNG exporter, roughly 13 percent of all gas produced in the U.S. was shipped abroad, up sevenfold from five years ago when very little infrastructure existed to ship liquefied natural gas.
Deeper connections between U.S. domestic gas market and the global market mean that prices are converging. In other words, with more and more U.S. natural gas diverted overseas, American consumers may no longer be able to purchase natural gas at rock bottom prices. Buyers and Asia and Europe can bid up prices, which drag up the cost of natural gas in the United States. That was not the case prior to the onset of major LNG export projects – gas traded in the U.S. and gas traded in Asia were in two completely separate markets.
With more and more U.S. natural gas diverted overseas, American consumers may no longer be able to purchase natural gas at rock bottom prices.
At the same time, higher prices could force a change in behavior for gas drillers, who have been mostly taking a cautious approach to new drilling since the beginning of the pandemic. Analysts see U.S. production hitting a record high 100 billion cubic feet this year. But with an increasing share exported abroad, even higher production will not be enough to return to the prices of years ago.
A forecast from Bank of America says that U.S. natural gas prices could average $3.45/MMBtu in 2022 and $3.10 in 2023 if the market is “well supplied.” That is the best-case scenario from a U.S. consumer perspective. Gone are the days of sub-$3 natural gas.
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