October 24, 2023
It’s Complicated: When the Issue of Natural Gas Pricing Isn’t Just About Natural Gas
This post by Jeff Bolyard, Principal, Energy Supply Advisory, is featured in our upcoming October 2023 Monthly Monitor, which includes articles and analysis for the natural gas, electric, crude oil, and sustainability markets. To sign up for the Monthly Monitor distribution list, click here.
Anyone watching the futures price of natural gas over the past two years has seen the price swing drastically. In 2022, the NYMEX final settlement for the year averaged $6.644/MMBtu – a 14-year high. Through 10 months of NYMEX settlements in 2023 so far, the average has been $2.697/MMBtu – nearly $4 lower than the year prior! During the high pricing period of 2022 (reality), the future price of natural gas on the NYMEX for 2023 and beyond (expected) was elevated as well.
The chart below shows the NYMEX pricing for overlapping time periods but from different time intervals, all of which represent pricing for the forward period of time from October 2022- December 2025. The orange line represents the future price of gas back on January 6, 2022 (prior to Russia’s invasion of Ukraine), while the black line shows NYMEX futures pricing on September 1, 2022. The purple line is the futures price as of 10/6/2023, which is combined with the known reality of NYMEX Last Day Settlements (green line) for months that have already passed us by and were known by 10/6.
The orange, black, and purple lines represent what the brightest minds in energy believed to be a fair future price of natural gas based on overall conditions in the energy market at that time. So far in 2023 (green line), the NYMEX has not settled, as previously predicted by the market. The “reality” is that no one can consistently predict the future price of natural gas, primarily because so many variables that influence the price of natural gas have little to nothing to do with natural gas itself.
I’ve compiled a list of non-natural gas influencers that already have and likely will move the price of natural gas in the future, although none are dependent on the number of wells being drilled for natural gas.
- Weather – Does anyone believe that an accurate weather forecast beyond the next 48 hours exists? Extreme weather drives energy pricing and the demand for natural gas around the world.
- Oil prices – Most natural gas production growth in the U.S. has come from oil-based production plays, not natural gas. If oil prices stay high and if infrastructure (also a big IF) can get built to move the associated gas, future production growth of natural gas is likely.
- Coal – While the percentage of coal-fired generation in the U.S. continues to fall, coal still made up ~20% of all generation last year and remains a significant part of power gen that is dispatchable. As that alternative dwindles, little is left to cover the growing peak demands that can be turned on. It is estimated that an additional 20 GW of coal-fired capacity will be retired by the end of 2026 – nearly all due to their inability to comply with environmental requirements.
- NGL pricing – Often overlooked, but becoming more important, are the hydrocarbon liquids (Ethane, Propane, Butane, Isobutane, Pentane) that are easier to transport than natural gas or hydrogen. The U.S. now exports more propane than we use domestically. The growing demand for NGLs around the world is becoming a larger part of the overall drilling equation.
- OPEC manipulation of crude supply – Related but separate from the price of oil, OPEC exists to manipulate crude pricing for their financial benefit, as evidenced by a voluntary cut of oil supply by Saudi Arabia and Russia of a combined 1.3 million bbl/day through the end of the year. Good for associated gas production, but bad for the overall economy.
- Geopolitics – Ongoing wars initiated by Russia upon Ukraine – and more recently by Hamas upon Israel – have completely reshuffled the energy deck of cards. What you thought you could rely on historically is no longer relevant. If you doubt this one, just ask Europe.
- Politics/Policy – Without a long-term energy strategy and a bipartisan political agreement, the goal line is destined to move, stifling the enormous investment needed from the private sector to provide cost effective and reliable solutions. If anyone can tell me who will get elected next year and who will control Congress during that term, this issue gets either clearer or muddier for the next four years. Policy – There is significant funding to advance energy technology and lower the cost of several contenders, which could help solve our energy challenges (hydrogen, carbon capture, nuclear). Details of how this money can be used is still unknown. Will there appear a frontrunner technology that will clearly provide a pathway towards stability in the energy markets?
- Low carbon energy transition – Supply chain issues, permitting, and inflation have limited the ability to bring more renewables/low carbon options online. Demand for lower-carbon solutions is outstripping available supply – even as overall power demand increases. The desire to move with speed is there, but turning off dispatchable fuel sources too quickly is causing unintended results.
While no one knows what pricing of natural gas will do in the future, or whether it will be higher or lower than the current futures price, most everyone believes there will be volatility as long as price influencers like these exist.
