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May 6, 2021

U.S. Natural Gas Prices Impacted by European Winter

By Jeff Bolyard, VP Commodity Strategy & Procurement

U.S. Natural Gas Prices

U.S. natural gas prices have risen from the NYMEX last day settle (LDS) average of $2.07/ MMBtu in 2020, a twenty-five-year low, to average $2.72 for the first five months of 2021 and currently trading over $3 /MMBtu in the forwards for many months. There are many fundamental reasons that have contributed to the price increase, but few as obvious as liquified natural gas (LNG) export demand. From zero LNG exports in 2015 to the recent peak that averaged 11.46 Bcf per day in April, this growing demand is now ~12.5% of all gas produced in the United States.

LNG demand has fully recovered from the COVID-induced low of 3.3 Bcf/day last July, an amazing 347% increase!

Statistics like these helps quantify the enormous growth but do not tie back to the cause, which, if you would assume to be money, are correct.

One market of U.S. LNG is the Netherlands, whose pricing benchmark TTF can be compared to the U.S. benchmark of Henry Hub, Louisiana. The chart below from Bloomberg compares the historical price of these two benchmarks (TTF in green and HH in blue), with the far right representing the current price spread. The wider the spread, the more profitable it is for U.S. exporters to send LNG to that region.

U.S. Natural Gas Prices

The costs to liquefy and transport the gas from the U.S. Gulf Coast varies by facility and destination, but the average netback to LNG owners has increased ~$1.00/MMBtu over the past month and is now solidly in the upper $3.60 per MMBtu range. Reasons for the TTF increase include a European YOY storage deficit of 1.4 Tcf (yes, Trillion, not billion) caused by extreme cold last winter and a recent announcement that Russia would not procure additional pipeline capacity through Ukraine in May. Both have placed more demand for LNG into the market.  These combined international demands for LNG have helped to prop up the U.S. Henry Hub price of gas the rest of the summer by $0.38/MMBtu and next winter by a quarter over the past month. This has helped to explain a piece of the demand increase in what is usually the uneventful shoulder month of April after winter is over and summer demand has yet to arrive.

The situation is evolving each day as domestic production levels rise or fall, and domestic storage makes progress or lags further behind the current YOY deficit. Not to be forgotten is the variability of crude oil prices which could contribute or reduce associated gas to/from the market by Q4 of this year. Six years ago, it was unimaginable that a cold winter in Europe or a pipeline capacity decision by Russia would impact natural gas prices in the United States but nevertheless, here we are.

Your gas buying strategy needs to consider these variables and the current and potential risk they impose.

If you are not comfortable with your current strategy, please reach out to your Edison Energy Manager.