Natural Gas: Fasten Your Seat Belts

Volatility could get even higher in the coming years, Mr. Rubin notes. The buffers that historically quelled severe swings are getting thinner. While domestic natural-gas consumption rose about 25% between 2011 and 2021 and exports more than tripled, natural-gas storage capacity that ensures adequate supplies in winter hasn’t budged. Data from S&P Global Commodity Insights shows that natural-gas prices spiked up a lot more than usual when storage fell below the five-year average. 

Moreover, the ability for the electricity sector to switch to coal if shortages arise is diminishing. That pressure valve has been disappearing at a pace of about 11 gigawatts worth of coal-fired capacity every year from 2015 to 2020. By 2029, about 23% of existing coal-fired power capacity in the U.S. is expected to be retired, according to the U.S. Energy Information Administration.

Low Storage, Big Spikes

Weekly average Henry Hub prices and U.S. lower-48 natural-gas storage inventory relative to a five-year rolling average

2012-16

2017-18

2019-20

2021

2022

2023

Data compiled Feb. 3

Inventory relative to rolling five-year average

(billion cubic feet)

2012-16

2017-18

2019-20

2021

2022

2023

Data compiled Feb. 3

Inventory relative to rolling five-year average

(billion cubic feet)

Meanwhile, natural-gas supply growth in the U.S. is expected to be somewhat constrained. Oil and gas producers are held back both by capital—investors are favoring companies with spending discipline—and a lack of new pipeline capacity, according to Matthew Palmer, senior director of global gas at S&P Global Commodity Insights. In an email, he noted that growth in the Marcellus and Utica Basins in the eastern U.S. has been capped because no significant long-haul pipelines to downstream markets have entered service since 2019. U.S. natural-gas prices also are set to become more linked to international-demand dynamics as liquefied-natural-gas export capacity grows: U.S. LNG export capacity is set to increase by an additional 40% by 2025.

What could worsen fluctuations even further are extreme weather events, which have become more common since the 1970s. That not only accentuates the highs and lows of natural-gas demand but also can affect supply. Colder-than-expected winter days have already caused more freeze-offs in natural-gas supply in recent years, notes Mr. Rubin. In 2021, a cold blast hitting Texas and neighboring states resulted in the largest monthly decline in U.S. natural-gas production ever and a 70-fold increase in local prices.

There could be a slight reprieve in the short run. The EIA expects U.S. natural-gas production to increase 2% in 2023, while this would be the first year without new LNG export-capacity additions coming online since 2016, when the U.S. began to export LNG from the Lower 48 states. Natural-gas inventory looks healthy, too, with storage exceeding the trailing-five-year average at the moment.

Any sense of relief, though, could be the calm before the storm. 

Photos: How the Century-Old Jones Act Affects Today’s Home-Heating Prices

Underwood Archives/Getty Images

Write to Jinjoo Lee at [email protected]