Will The U.S. Be Spared From The Global Energy Crisis?

Submitted by Tsvetana Paraskova of OilPrice.com,

U.S. natural gas prices hit a 13-year high last week as the energy crunch in Europe and Asia pushed the prices in these two regions to the highest on record. And depending on winter weather, U.S. natural gas prices do have more room to rise. But they are unlikely to follow the skyrocketing rallies of the European and UK gas prices and the price of spot liquefied natural gas (LNG) in Asia, analysts say.   

Although the regional natural gas markets are now interconnected more than ever thanks to the LNG trade, U.S. gas prices will largely be spared the extreme volatility and record-high European and Asian prices.

The United States has a fairly adequate natural gas supply in storage ahead of the winter. This is unlike Europe, where depleted inventories and rebounding demand have created a rush to stock up for the coldest months of the year, which in turn has caused a supply crunch and record-high gas and power prices.

Moreover, U.S. natural gas production is rising slightly, while weekly injections into storage over the past month have been higher than usual for September.

Despite the record LNG prices in Asia and the handsome netbacks that U.S. exporters are getting for their LNG cargoes, the United States has a certain capacity to feed gas to its LNG export terminals. All cargoes available will be scooped up, mostly by Asia, but the infrastructure will not allow too much incremental LNG supply out of America that would have severely tightened the domestic U.S. market.

Record Global Gas Prices

Last week, natural gas prices in Europe hit a fresh record high to the equivalent of $205 a barrel of oil based on the relative value of the same quantity of energy from each source. The worsening global energy crisis sent Asia’s spot LNG prices soaring by 40 percent last Wednesday, as cargo for delivery into North Asia in November was priced at as much as $56 per million British thermal units (mmBtu)—a record high that beat the previous record from the week prior of $34.52/mmBtu.  

In the turbulent global markets, U.S. natural gas prices also reacted to these mind-blowing record highs, and the benchmark Henry Hub price settled at $6.312/mmBtu on October 5—the highest level since 2008. 

Since the beginning of 2021, U.S. natural gas prices have more than doubled as demand is bouncing back from the pandemic slump, and American producers are not rushing to add too much supply.

U.S. ‘Insulated’ From Global Gas Crunch, Price Spikes

However, U.S. prices—despite being now more influenced by global gas prices—primarily reflect domestic supply-demand factors and the booming global LNG demand. So, American natural gas prices are more insulated from the global spikes in gas prices, even if they have further room to rise in case of a colder winter in the United States.

“The U.S. is much more insulated from this global energy trend than the rest of the world,” Francisco Blanch, head of Global Commodities, Equity Derivatives and Cross-Asset Quantitative Investment Strategies at Bank of America Merrill Lynch, told CNBC’s “The Exchange” recently.

Sure, analysts now expect U.S. natural gas prices to be higher than earlier forecasts because of the ripple effect of the global energy crunch and natural gas price rally. JP Morgan and Credit Suisse have recently raised their Q4 average price outlooks to $5.50/mmBtu and $5.75/mmBtu, respectively.

A double-digit Henry Hub price is in the cards if the winter is very cold, but a crunch similar to Europe and Asia’s is unlikely for the United States, Robert Thummel, managing director at TortoiseEcofin, told CNBC last week.

“[The U.S.] hasn’t had to rely on the rest of the world to provide its supply, and that’s really what Europe’s problem has been,” Thummel said.

In addition, U.S. LNG export capacity is not infinite, despite the nice netbacks exporters would get because of the large premium of LNG prices in Asia to the U.S. Henry Hub prices.

“You’re not going to see the U.S. to the rescue here, because there’s just not enough infrastructure on either side — on the U.S. side or the European side and most importantly on the Asian side — to solve this,” Thummel told CNBC.

Regardless of how much Asian LNG prices surge, the current capacity in the United States allows 10.5 billion cubic feet per day (Bcf/d) of gas to be turned into LNG. Natural gas deliveries to U.S. LNG export facilities typically average 10.0 Bcf/d – 10.5 Bcf/d, out of total U.S. dry natural gas production of around 92.3 Bcf/d.

U.S. Gas Supply More Adequate Compared To Europe, Asia Crunch

The U.S. has an adequate natural gas supply, and although the injection season between April and October has seen lower-than-average net injections into gas storage, recent weekly stock builds have exceeded the average for this time of the year.

The net injections into storage totaled 118 Bcf for the week ending October 1, compared with the five-year average net injections of 81 Bcf and last year’s net injections of 75 Bcf during the same week, EIA data showed.

This week’s weekly build is again expected to be a bit larger than the five-year average and potentially again over 100 Bcf, according to NatGasWeather.com, which also forecasts low to very low demand for this week.

U.S. natural gas prices are not entirely detached from the global energy turmoil, but America will likely be spared the skyrocketing prices elsewhere.